Going to an auction is somewhat unpredictable. You may know beforehand which houses will be auctioned. Still, you don’t know if the winning bid will be too high, if there will be too many potential buyers, if you carry enough cash, or if the house you end up buying is, ultimately, as good a deal as it looks like. “When you buy something, you’re taking a shot at the lottery. And you should never gamble with your money,” advised Richard Cinta, real estate investor and owner of a title search company, in his last webinar at Real Estate IQ.
Gladly, if you want to take his recommendation, there’s something you can do to decrease the amount of unpredictability. And what is that, you ask. Well, it’s doing your homework correctly.
Why is it important to check out the title before an auction?
The expert repeated several times that it’s crucial to do a title search before going to an auction and not afterward. And the reason for that is to identify which properties consist of a real opportunity and which ones, although they might seem like one, are most probably going to give you headaches. “The way to land more good deals is always to do your homework before you buy it. The best advice I can give you is to research as many properties as you can,” Cinta pointed out.
The investor explained that there’s always a 40 to 50% chance of cancellation of the total amount of properties auctioned. So, if you only researched one or two homes and they are withdrawn, you end up without a trustworthy place to bid on. Therefore, you either go back empty-handed (and have to repeat the whole process the following month) or with a property that you bought out of despair, and that can be very bad for your investments.
It’s sort of going out on a fishing trip. The bigger your net is, the higher the chances of getting something. Successful people research 10 or 20 deals every month, and sometimes they even reach 100 deals. Hence, if they get outbid on a few, they still have five or ten properties to go after. Instead of thousands and millions of dollars for a property that can’t return your investment, it’s always good to spend a few bucks and research.
Richard Cinta, real estate investor and owner of a title search company.
Now, let’s say that you want to research before the auction. The question is, what should you look for? What are the indicators that show whether a deal is convenient or not? If you’re wondering the exact same thing, keep reading!
What to look for when doing a title search
“When you buy properties at auctions, there are some things that you can do to clear up the title, and with some properties, you won’t be able to do that,” Cinta observed. The first thing to know is that every state has its own rules determining how liens get wiped out at auctions.
In this case, Cinta focused on Texas, where there are two types of foreclosures in general: tax auctions and mortgage auctions. The title search characteristics depend on the auction, and this is what you should look for.
Mortgage auctions
Mortgage auctions are non-judicial. Generally, the older lien has seniority over the ones that followed. For instance, if the first lien was foreclosing in 1980, any mortgage filed after that would be wiped out. Keep in mind that this only happens when you buy the property at an auction. If you purchase it from the owner, those other mortgages would have to be paid off.
Despite this general rule, you must do a title search to know what lien position the mortgage that’s been foreclosed on is in. Typically, it’s a first lien; however, sometimes it can be a second or a third, and in those cases, you’d have to pay the previous liens later on, or you’ll be the one to be wiped up.
So, there are two main things to ask before buying properties at mortgage auctions: is this the first lien, or does the property have an IRS lien on it. If it’s the latter, liens only get wiped out if the trustee notifies the IRS of their options. “This happens 95% of the time, but about 5% either the trustee works for the government or are naïve lawyers and don’t know the process. In any case, if the IRS isn’t notified, the lien doesn’t get wiped out, and you have to pay it off,” warned Cinta. There’s another way to clear up the title in this case: IRS liens expire ten years from the date they’re filed.
Tax auctions
Tax auctions have different rules than mortgages. When someone is delinquent in their property taxes, taxing authorities have to file a lawsuit against the homeowner and all the liens before they can foreclose on that property. As long as they do, everything gets wiped out.
In this case, it’s essential to do two types of research. The title shows you what liens are on it and who the homeowners are. The second search you need to do is called a tax lawsuit search, to verify if all the parties were notified and if there’s a potential problem with that property.
Richard Cinta, real estate investor and owner of a title search company.
However, if a tax property has an IRS lien, it’s handled differently. If the IRS lien was notified and brought into the lawsuit, then the IRS lien expires, and you’re fine. But don’t forget that the IRS has a federal right of redemption of one year. So, you’ve got to hold on to it until that year expires.
Lastly, the prior homeowner also has the right to redeem the property. They can come back and have the right to repurchase it from you, but they have to pay you what you paid for it in the first six months plus 25% interest.
To sum up, many profitable deals can be done by buying at auctions, but it’s critical to research before attending. You can get the information to do a title search by subscribing to Real Estate IQ’s off market listings and be prepared to win the right property to invest in. “Generally speaking, first liens rule in mortgage cases, and tax lawsuit searches are needed when you’re buying tax property. You could have a million dollars of debt on a property, but if they’re notified, they get right down,” Cinta concluded.
Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice.
