MEbiz Real Estate Insider – Risky Business? Due Diligence Hints for Bidding at a Foreclosure Auction

By Wendy Paradis, real estate attorney

Know a property being foreclosed, or see the signs and advertisements for foreclosure actions? They are everywhere. It is important to do your homework before bidding. Bid confidently by doing some pre-auction investigation.

• ME has two methods of foreclosure – a power of sale (the court is not involved, primarily commercial properties), and a civil action foreclosure (there is court order, primarily residential properties).
• Start by attending some foreclosure sales – they are “public” sales and generally open to the public to observe.
• Sign up for emails on the local auctioneers’ websites to become familiar with the terms of sale, the draft (creditor friendly) purchase and sale agreement and terms and condition of sale.

• • The successful bidder often pays all outstanding municipal tax and utility district charges, real estate transfer tax, recording fees, etc. Terms require increase of deposit to 10% of the purchase price within a few days of the auction and a closing in 30 – 45 days. Cash or financing must be in place.
  • Auction deposit is forfeited if closing does not occur in accordance with the terms of the purchase and sale agreement.

• Visit the municipal office for the tax card, site plan and any other information available. Search the title – to be able to sell free and clear of all junior liens. , These junior parties must receive notice of the foreclosure sale. Unless the foreclosing mortgagee can show proof of service on all junior parties, their liens are not extinguished.
• Is there a mobile home or other semi-permanent structure on the property? If so run a UCC search on the current owners.
• In a civil action foreclosure, the judgment of foreclosure and order of sale must be recorded and it will state all junior lienholders, the amount owed at the time of entry of the judgment and the name of the foreclosing mortgagee’s legal counsel. Residential mortgages will state if there is a mortgage insurer and each mortgage insurer has website information about bidding and auction guidelines. Look at the property – residential properties should be vacant and neighbors may be able to provide information about the property.
• Commercial properties are likely subject to leases of existing tenants and a rent roll may be available for cash flow analysis.
• ME law allows and auctioneer or an attorney to hold the sale, many auctions are conducted in an attorney’s office and not at the property.
• Read the terms and conditions and how to pay the bid deposit in certified bank funds.

Bidding is fun and what a great way to purchase a vacation home or become a landlord, but only if you have taken the time to investigate the auction process and the property. Otherwise, it can be a risky business venture.