This is the second in a series of short articles on Howard County Maryland’s real estate market from the buyer’s viewpoint. For other articles see: How to Value A Home (Recognizing Value); Finding Great Deals – Auctions & Foreclosures; Finding Great Deals – FSBO and Short Sales; Finding Great Deals – Realtor® MRIS; and How To Negotiate A Great Deal.

Howard County’s Best Home Deals – Part 2

(FINDING Great Deals – Auctions & Foreclosures)

Where is the best place to look for a great deal on a home in Howard County today? For sale by owner? Auction or foreclosure? “Short sale”? Word-of-mouth? The Realtor® owned multiple listing service, MRIS? Let’s review each.

Howard County Real Estate Auctions

There are two types of “auction” sale – absolute auction, and reserve auction. In an absolute auction the property shall be sold to the highest bidder, regardless of price. In a reserve auction, the seller retains the right to not accept any bids if he feels the price isn’t high enough.

The word “auction” induces strong emotions in buyers, making them think a bargain can be had. However, most private auctions are of the “reserve” variety. Unless you see the actual words “absolute auction” in the ad, assume an auction is a reserve auction, where the seller can turn down all offers if his or her bottom-line price isn’t met.

Since most private auctions are “reserve”, or non-absolute, the net outcome is often the same as any other means of sale: if the seller’s bottom line isn’t met, there is no sale.  Such auctions are simply a colorful method for a seller to “market” her home.

Howard County Real Estate Foreclosures

A foreclosure sale is the end of a legal process by a lender against the homeowner/mortgagee to seize a home for non-payment of the mortgage. In Howard County foreclosure auctions typically take place on the steps of the Howard County Circuit Court, Court Place & Park Avenue, Ellicott City. Foreclosure auctions are always “absolute auctions” (see above).  In Howard County real estate foreclosures are advertised in the Howard County Times, which is the newspaper of legal record for the county.

When people refer to “buying a foreclosure” they may mean either buying live at the foreclosure auction (being the successful, high bidder); or they may refer to buying a home after it has been foreclosed upon (buying from the successful bidder).

Buying A Previously Foreclosed Upon Home

Buying a home that has previously been foreclosed on is usually not that different from any other home purchase.  Whether the home went through foreclosure with HUD, VA or a private lender, such homes are nearly always listed with a Realtor® and listed for sale on the Realtor MRIS system.

Homes previously foreclosed on can be located, and purchased, pretty much the same as you’d purchase any other home – except for the fact that the home went through a legal/financial “cleansing” process called foreclosure.  Sometimes these homes are very well priced compared to the rest of the market, but just as often (and stupidly on the foreclosing bank’s part) these homes are often offered for sale at a price well above the rest of the market.

Buying a previously foreclosed home is like like buying a previously owned car from a car dealer – often you wouldn’t know, or care, if the former owner had had their care repossessed or not. All you care about is the overall condition and price of the car as compared to the rest of the market.

Most of Howard County’s previously foreclosed homes can be found at this site.

Buying Real Estate At A Foreclosure Auction

Lawyers.com says this: “Buying at a foreclosure auction is the riskiest way to purchase foreclosed property, and shouldn’t be attempted by a first-time buyer.”  If you are a “normal” home buyer who intends to buy a home to live in it you should almost certainly avoid buying at a foreclosure auction for three reasons: (1) risk; (2) financing; and (3) price.

Buying a home at foreclosure home is risky. You must put up, in cash, 10% of the auction sales price at the close of the auction, and you will forfeit this money completely if you fail to get your purchase loan or fail to settle for any other reason. Also, you are NOT allowed to make your purchase contingent on a professional home inspection – and often you aren’t allowed to even inspect the home yourself prior to the auction.

Financing an auction purchase can be difficult. Often these properties are in severe disrepair and banks are reluctant to loan money on them, especially in today’s market. There is a good chance you won’t get financing (and lose your 10% deposit), and/or will have to pay a higher price for financing.

Finally, the cost of buying at auction is higher than you would think. First, most foreclosing lenders require you to pay both buyer’s and seller’s share of transfer and recording taxes – adding an extra 1% to the sales price. Also, you are required to pay ALL expenses beginning the day of the auction (interest on your bid amount, property taxes, utilities), even though you won’t get actual possession for usually another 4 – 6 weeks. And, since you haven’t been able to inspect the property prior to auction, you must assume it is in poor condition and requires extensive repair.

Given the added costs and risks of buying at foreclosure, a home would need to sell for a minimum of 15% below “market value” in order to be a decent deal. Your blog host has attended dozens of Howard County foreclosure auctions, and typically the sale prices exceed that amount. (Either because an inexperienced buyer is bidding, or because the foreclosing bank is bidding the full amount of their mortgage, which exceeds the value of the home).

In short – while it is possible in the best of circumstances to “get a deal” at auction and save tens of thousand off the price… it’s far EASIER to lose tens of thousands buying at auction, especially for the inexperienced.  These types of purchases are therefore far more suitable to experienced (and well funded) investor, who can afford to lose thousands in the hope of making thousands.

As per usual, Email John Toner if you have any specific questions I could help with.  Blessings!

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