Can I stop short sale from going to auction?

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Dear Real Estate Adviser,
I found my dream home recently via short sale, and my offer was accepted. But the seller’s agent has now advised me the home is scheduled to go to auction next month. Do I have a chance of closing the deal before the auction, since the seller and I have a signed contract? How do I know if I’m wasting my time?
— Luke M.

Dear Luke,
You don’t know if you’re wasting time, to be honest, and that’s one of the rubs of short sales. They promise great bargains but tend to fall apart at the last minute for myriad reasons.

First, you need to find out if this house is still in short sale status or if it has advanced to foreclosure and is now classified as a bank real estate-owned, or REO, property. A good buyer’s agent should have been able to warn you about any pending action and help you navigate from there. Sometimes, such problems occur because the foreclosure arm of a bank doesn’t always know what the short sale arm is doing.

If you don’t have an agent to run interference for you here, the title company should be able to tell you who the owner of record is now. That’s important information because there are two distinctly different types of auctions: a foreclosure auction where the bank has taken possession of a property, or an auction that’s simply an effort to sell a house that hasn’t gone back to the bank yet. If it’s indeed a foreclosure auction, you’d need to have cash on hand to bid at auction.

Possible communication snags aside, why else would a bank schedule an auction date with your deal hanging in the balance? Sometimes, banks foreclose during the short sale process simply because they believe the owners are trying to delay eviction. Other times, some banks have a policy where they won’t seriously consider any short sale offer unless the home has first been slated for auction, as peculiar and frustrating as that scenario might seem.

A signed contract, by the way, won’t stop a foreclosure auction because the bank’s action supersedes it. You might have legal recourse if the place is sold out from underneath you in a nonforeclosure auction, but the legal deck still is stacked against you. Whatever occurred, the bank might agree to delay or even cancel the auction if you can demonstrate you have a palatable, funded offer on the table. This is where a good agent could help you.

If the auction does go on, it might behoove you to attend if you truly consider this your dream home. But don’t be surprised if the bank opens with your offer price. If someone matches, you can bid upward if the place is really worth it to you. If no one matches it, the bank may then drop the minimum until it gets bids. Don’t forget you’ll need cash on hand if you hope to buy at a foreclosure auction. The one leg up you would have in a foreclosure auction is that you know the condition of the house better than other bidders, who typically have limited access to the premises.

If it’s any concession to you, thousands of others just like you have been beaten back by the labyrinthine, often frustrating short sale process. But don’t give up. From the sounds of it, you still have more than a fighting chance to realize your dream.

Good luck!

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