When a property's owner fails to pay its mortgage, the loan falls delinquent. After a significant delinquency, the mortgage lender will file paperwork with the local court to auction off the property. The court then reviews all the documents it receives from the property owner and the lender. If it finds that the lender's case is valid, the court will then auction off the property, generally starting at the price of the loan. Investors can then bid on the property. If the auction is successful, the winning bidder must complete steps to buy the property.
Bid Assignment Paperwork
Putting in the highest bid doesn't automatically make the bidder into the new owner. Instead, the winning bidder at the auction must file paperwork with the court, certifying that she did make that bid. If the bidder fails to turn in that form, the next highest bidder is considered the winner. If she does turn in the bid assignment form, the court grants her the right and obligation to buy that property at the price she bid. Real estate auctions are generally handled by a county-level court, and each county has its own bid assignment form.
Once the court has received the bid assignment from the winning bidder, the court then finally completes the last step of the foreclosure process: transferring the title. This process legally takes the property's title away from the first owner and gives it to the new owner. That new owner must pay cash to the bank for that property, either by paying outright or by taking on a new mortgage and using that loan to pay the amount she bid. This completes the foreclosure process.
Auctions set their base price at the loan amount that's still owed to the bank. If the property is "under water," or worth less than the amount of the loan, often there will be no bidders. If no one in the auction bids on the property, the property then becomes "REO" or bank-owned. The court will formally take the legal title to the property away from the original owner and transfer it to the lender.