Posted by: The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

40 responses to “Reader Question: Buying Foreclosures at Auction?”

  1. Russ

    A couple of weeks ago I headed up to Everett to check out the whole process. There was a house in my neighborhood that was supposed to be auctioned off, so I was curious what it might go for. The whole scene is very chaotic and confusing to the uninitiated. 5-6 people from different lenders stand there calling out the addresses to different properties, the majority of which get postponed. You have to get there early enough to talk to a few people, so you can figure out where your lender is. One lady was just standing there reading her list so quietly you couldn’t hear a word she was saying. They must have to go through the procedure for legal purposes. I never did find out who had the property I was looking for. All in all an interesting process, but you definately need some experience with it for it to be worthwhile.

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  2. random guy

    A few mostly uneducated thoughts.
    1) I think the bank usually won’t sell for less than the outstanding balance on the mortgage, so to get a good price you need to pick a place that has a balance lower than you want to pay. The balance is on the notice of trustee sale.

    2) You don’t know what the condition of the house will be. The borrowers may rip out and sell all the appliances, copper wiring and plumbing, or they could leave it in great condition. An experienced investor would demand a steep discount for the risk (if they were smart), but even so you may lose a lot on a particularly trashed house.

    3) Once you win the auction, you probably have to evict the borrowers, give them a lease, or let them live there for free. Could you see yourself evicting a family from the house they live in?

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  3. Jack

    Real estate agent is paid by the seller not the buyer unless the value of a property is so low that there is nothing to cover his gas and his/her time.
    Than There is a minimum you should pay to convince him her to work for you. if you want to buy super cheap otherwise he / she can get hired by Mac Donald in in order to achieve higher income.
    I Think is silly to do the work somebody is going be happy to perform for you for no charge on your part.
    Auctions are rip off trying to screw up the real estate agent bringing the buyer and more than often the properties are on auction with starting price above real market value.
    So quite often ( at least in Chicago area) you see same house later lower priced listed on MLS

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  4. Kary L. Krismer

    By random guy @ 2:

    A few mostly uneducated thoughts.
    1) I think the bank usually won’t sell for less than the outstanding balance on the mortgage, so to get a good price you need to pick a place that has a balance lower than you want to pay. The balance is on the notice of trustee sale.

    . . .

    3) Once you win the auction, you probably have to evict the borrowers, give them a lease, or let them live there for free. Could you see yourself evicting a family from the house they live in?

    I’m not sure #1 was ever true, but it is undoubtedly true that the number they think the house is worth is more likely to be high than low.

    As to #3, it’s not the borrowers you need to worry about as much as tenants. They likely have increased rights under both state and federal law and likely need not get out 20 days after the foreclosure sale.

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  5. Kary L. Krismer

    RE: The Tim @ 4 – I think he may be talking of auctions of REO property, not foreclosure sale auctions.

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  6. Julie Lyda

    The biggest and most dangerous pitfall is not knowing what liens are on title. Recently there was a story about a man who bid $100,000 on a house and won the bid. Later he found out he just bought the 2nd mortgage and there was still a 1st mortgage $529,000 exceeding the value of the home.

    They lost the home through foreclosure and their 100K investment.
    http://www.auction.com/blog.php/_ouch-buyer-buys-worthless-second-mortgage-auction

    Title research is one of the most important part of due diligence you can do.

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  7. Ross

    By Jack @ 3:

    Real estate agent is paid by the seller not the buyer

    Only the buyer brings funds to the table to pay for a home. That means all fees, taxes, commissions etc. are paid out of buyer funds. Saying that the seller is paying for a realtor is kind of like saying that a retailer pays the taxes when a retail purchase is made. (Even in those “we pay the taxes” promotions, its ultimately the buyer paying for them).

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  8. Dennis

    There are county auctions held on the courthouse steps in every county of Washington State. The biggest challenge faced by the general public is accessing the constantly changing stream of information coming from the trustees responsible for managing these sales by the banks. You mentioned Vestus, but there are several companies who, for no charge, will allow users to access that information. Most only require that users sign a form agreeing to pay a purchase fee (usually 3% of the assessed value) to the information provider if they purchase a home at auction. As another party mentioned, there is some not insignificant risk associated with purchasing at auction, however, the firms that provide the information access will often also offer some education to prospective investors and buyers. A division of our Real Estate team is specifically dedicated to the auctions, and every week they are driving properties, taking pictures, gathering title information and performing the due diligence necessary to allow our clients to make an informed decision. It’s important to note that ALL auction purchases are cash on delivery- you make the winning bid, you turn over your check to the trustee. That said, auction financing (also called transactional financing) is available. Because of the convenience of this service, it is typically expensive, short-term financing, with 12% being the typical rate. The reason for the high rate is that the lender/investors want you to be incentivized to re-finance out of it quickly (90 days or less, ideally), so they can turn their money over into another project (it’s not in their interest to have the money tied up long-term) So, there’s also re-financing available to get you out of the short term, and into conventional fixed-rate financing. We hold classes on buying homes at auction at our office in Bothell every Thursday evening 6-8pm, for those who are interested.

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  9. BillE

    By random guy @ 2:

    2) You don’t know what the condition of the house will be. The borrowers may rip out and sell all the appliances, copper wiring and plumbing, or they could leave it in great condition.

    That reminds me, I think there should be a new measure of foreclosure activity based on the appliances being sold on craigslist.

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  10. Grant Weaver

    My name is Grant Weaver and I am a Real Estate agent who is part of the Pickett Street Properties team. We represent investors at the King (both locations) and Snohomish county auctions each week. Below are the answers to your questions. We also offer an free introductory class outlining how to buy at the trustee sale at the court house steps.

    1.Is there a way to find lists of properties going up for auction without paying a subscription service like realty track? We provide a website that is updated with what properties are going to sale (and what the minimum bid will be), which are post-poned, which are called off. We do not charge a subscription for this service, we do ask that you work with us to purchase the property.

    2.I’ve heard of auctions “on the county steps”. What does that mean? The homes are sold on the steps of the court house. Different trustees are hired by the lien holder foreclosing on the property to sell the property by way of auction. You will have to qualify with the correct trustee in order to buy a home. We go over how to do this in our class.

    Are all auction homes sold that way in Snohomish county or are there private auctions as well? All trustee sale homes are sold this way. The banks do hire auction companies to sell their inventory when they can’t sell them through the MLS.

    You do not necessarily have to lose out on a home that is trashed by the former owner. We cover how to prevent this in our class.

    3.Once you find a property you’re interested in, how should someone research the property to find out about legal or title issues with the property? We work with a title company to clear title and find out what will survive the foreclosure and what will be wiped away. This is part of the value our team brings that other groups do not. Other groups are not willing to incur this cost. This gives our investors an advantage as they can buy homes that other investors could not clear. We have had several investors buy because of this without competing for the property.

    4.Is there any way to get inside to view auction properties? Yes. If the property is occupied you can knock on the door. Some of the owners will let you in, some won’t. We go over how to do this in our class.

    5.Is it possible to get these properties inspected before the auction? If you get permission from the owner I suppose it could happen. Our investors never have inspections prior to purchasing. It is a higher risk purchase however you are buying a property 50 to 75% below market value.

    6.I’m guessing that someone purchasing real-estate at auction must be paying cash. Is there any other strategies for tying up the property while securing financing? yes, all cash is required to purchase, however we have several lenders who will provide cash on the day of the auction. You just need to get pre-approved with one of them.

    7.Any other advice from folks investing in these properties would be appreciated. Come to our class. It is free and you will have all the information you need to decide if this is something you would like to do.

    The minimum bid provided by the banks varies. They do provide enough bids far enough below market value to cause several sales each week. In many sales I am hired by the bank to help determine the market value which they will use to set a minimum bid. It does not always come in at market value.

    The real estate agent at these sales is paid by the buyer not the seller. You have no idea the amount of work and research that goes into buying a property at auction. The risk mitigated by working with us far outweighs the fee we charge. We represent seasoned investors who have been doing this for 19 years to new investors buying their first investment property. You are more than welcome to talk with them.

    Tenants have up to 90 days after a foreclosure to vacate the property, previous owners have 20 days. We show you how to deal with this and help them relocate more quickly.

    If you have questions or are interested in coming to our class please contact me at [advertising deleted].

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  11. Jesse D. Moore

    Buying at trustee’s sale (or “auction) can absolutely be a value. I am a licensed real estate agent, and considering that I think that the market in Snohomish County is likely to drop another 10% before stabilizing, I definitely counsel buyers before they rush into the “retail” market. So instead, many of my buyers over the last six months have decided to make their purchase at trustee’s sale. Yes – the pay my commission instead of the seller, but they are also buying at 60-80% of market value. You do have to be careful, but a good representative will do their research, including pulling title and making sure that no subordinate liens survive the sale. There are half a dozen groups that represent buyers at auction – Vestus is one, and my team represents Snohomish County for another group (called Fairplay Foreclosures).

    As for the opening bid, there really isn’t any rational involved (it’s a bank after all). For whatever reason they do drop the bids (on occasion) below the amount owed. These are called “drop-bids”, and these can be the best values at trustee’s sales. There are other properties that have low first-lien balances and high subordinate lien balances, and if the first lien is foreclosing on a property, then there can be considerable value between the opening bid and actual market value.

    I could go on and on, but I’ve already written about one buyer’s story. If The Tim allows the link, you can read about one buyer that purchased a home to occupy at the auction in Snohomish County: http://bit.ly/hLGGKh

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  12. EconE

    Makes me think of those guys in the NYTimes article who bought a house at a foreclosure auction only to find out that it was the 2nd mortgage that was being auctioned off.

    I’d use an agent and wait for the house to become an REO myself.

    Speaking of agents…I’m surprised Ray Pepper hasn’t commented yet. Perhaps he would be the go-to agent for these types of transactions?

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  13. Jonness

    By EconE @ 9:

    ]
    Speaking of agents…I’m surprised Ray Pepper hasn’t commented yet. Perhaps he would be the go-to agent for these types of transactions?

    I think Ray or any of the agents who work for him most likely know these auctions like the backs of their hands.

    As for Vestus, you get free access to their website, but if you buy anything within 6 months of terminating their services, you owe them 3% whether you got the info from them or not.

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  14. Dennis

    Since my previous comment got moderated out of existence (apparently a reference to educating consumers is now considered advertising?) I’ll just say that the information is available from other sources. I can’t tell you where, because I’ll be censored again, but the info can be found at places other than the one previously mentioned. I’m not sure what ad fees they paid to get a free mention, but whatever…. If you come to the Snohomish county auction any Friday at 10 am, there’s a chance you might see someone who looks like me. And we might talk, and I might be able to explain the process to you, and you might learn something interesting and maybe the whole system won’t seem so intimidating. We can hope…

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  15. ray pepper

    RE: EconE @ 13

    Ray is IN THE HOUSE!! Been working on the new property in Gig Harbor and between that and Coaching I have taken some BUBBLE time off.

    Heres the deal..

    I use data Snap.

    I do all my own research and sometimes I get in the property and sometimes I do not. I always assume the worst when I can’t get in. Talking to the neighbors goes a LONG way.

    Vestus, Foreclosure Solutions,Data Snap and all the others “clip you 3%” of the tax assessed values when you buy, but you get a decent meal on Thursdays nights at their “dog and pony show.” HINT…NEVER pay 3% of the tax assessed value. Negotiate it. REMEMBER THIS! They also want to list the property you buy. Remember never pay more then 500 to LIST, after you purchase and fix up, but if your doing Trustee Sales you already know this.

    Hard Money is 12% and 4 points with a 2 pt rebate if you refi/payoff in 60 days. 9 month term , 12%, interest only. Personally, I love the hard money. Let them haul their cashiers checks to the sale. I catch up later in the day with my 20% down. This is an avg exp of hard money terms.

    Many deals get postponed but who cares..Keep them in your data banks.. They should come back down the road. I have my Agent bid for me LIVE over the phone. I refuse to sit in the rain and can hear quite well from my phone.

    You will get outbid by boneheads they will no doubt become bagholders and will be paying too much. I see it again and again. The hard Money Lenders will foreclose on you quicker then Steve Tytler can trap you in a loan.

    The Trustee Sales are the single BEST place to buy property followed by REO’s, Short Sales, Estate Sales, Highly Motivated sellers, etc….In that order.

    Title is very important and when you are in Data Snap , Vestus, etc you are given title and liens that must be paid. You factor these into your purchase price.

    There is absolutely NO REASON people should shy away from Trustee Sales. These should be included in your search along with MLS listed properties. If you area Bubble reader you can do it.

    Due Diligence……………Be Smart………….C U There every Friday (but, only on Sunny Days)

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  16. ray pepper

    Just last Friday:

    3705 S 12th 98405

    Opening Bid 51,750.00 (Great Deal–est flip 99k-109k) (needs 5-10k in fix up MAX..no liens!)

    Gave my guy a high bid of 53500. Never got in house. Tenant occupied. (I had Landlord Solutions all ready to serve notice post sale)

    Up against only 1 other interested person. Worst part was he wanted it. That is VERY bad for me.

    Bidding started in 100 increments. When we hit 53400 my data Snap guy said Ray we are close to your bid limit and this guy is not stopping. Then he suddenly jumped the bid to 54k (500 higher!) As I was scratching myself I heard Ray, ray, Ray..by the time I said 54,100 he got it ….SOLD. Anyway as I found out later the HIGHEST he would go would have been 55k. SO HE SAYS! Anyway he got a great deal and will turn a quick 30k +.

    What did I get…NOTHING….But, who cares. There are SOOOO many more coming over this decade I could care less….Always move on and wait for the next.

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  17. Aaron Smothers

    Bank of America is supposed to have held an auction on foreclosed Buchan houses in the Seattle area on January 7th:

    http://www.istockanalyst.com/article/viewiStockNews/articleid/4550310

    Anyone knows what happened at that auction–how many of the 46 properties came up for sale and how many got sold etc?

    AS

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  18. softwarengineer

    Step 1: Do a Thorough Title Check

    Leans and such on the property’s Title may actually be a good thing for the savy buyer, as less buyers will bid against you….but, you’ll need 100% of the cash to cover your bid and the leans too.

    Buying the property before it’s auctioned from the owner [you'll need to be a good psychologist] is the cheapest way, but finding distressed properties without a fee may mean twisting some arms [legally] and/or handing out business cards at key locations…..if you find out about a property like that, keep your mouth zipped or someone will buy it out from underneath you.

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  19. Grant Weaver

    In regards to the Buchan auction that was for John Buchan homes. I spoke with the broker of the John L. Scott brokerage last week that sells their homes. I was told the auction was cancelled as they were able to sell all but 6. Bank of America recognized that they were able to minimize their loss by letting the JLS agents sell them so the auction was cancelled. In fact Buchan is now starting construction on two new plats.

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  20. Grant Weaver

    Buying a property before it goes to the foreclosure sale is called a short sale. That is a little misleading as the process is anything but short. The term short comes from the fact that the lien holder has agreed to allow the owner to sell the property short of what is still owed. Generally you will be able to buy this type of a property at a larger discount than your standard retail sale and I have been seeing a them selling below comparable REO (bank owned) sales recently. Still the best deals are found at the trustee sale. The problem with the short sale and why it can take so long (3 to 9 months) to close is the lender has to agree to the sales price. Even is the first lien holder agrees the second lien holder my not if their is a second. Also mortgage insurance can get in the way. If any of those entities don’t agree, the sale will not go through. Banks are getting more efficient with this process and have created new programs to speed the process up. My advice…if you’re looking to flip properties I would avoid short sales. With flipping you need to turn your money over more quickly. If you are looking for a primary residence…this could be an option if that is the only home you want. Just be aware you will be in it for the long haul and have to jump through a lot of hoops for the banks…and these hoops change with each transaction

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  21. Dennis

    RE: The Tim @ 20 – TIm- my apologies! I saw the other 2 posts from my colleagues, but didn’t see mine, and jumped to conclusions. Sorry. I was aware that Grant was writing, but as Jesse was out of the office, I didn’t know he’d be dialing in, too. What can I say? Shoot first, ask questions…. anyhow…

    Thanks for the great topic, we’ll keep an eye on it.

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  22. hp

    One of the things you need to know is you will usually not get it for less than the amount pending on the first lien. There are tax advantages that banks have if they buy it for the value of first lien note and sell it as REO on the MLS at a loss. Not to say this will always be the case but usually it is. We just bought a house in bothell which was bought by the bank at the auction at $475k (pending first loan value which wiped out a secondary lien of around 60k and a home equity loan of around $170k). The bank then turned around and put it on the market for $454k a couple of days after the auction and they reduced it to $410k a month later. Auctions are much more risky, you are better of buying an REO and trust me there are plenty of them in Snohomish county.

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  23. Kary L. Krismer

    By Julie Lyda @ 7:

    The biggest and most dangerous pitfall is not knowing what liens are on title. Recently there was a story about a man who bid $100,000 on a house and won the bid. Later he found out he just bought the 2nd mortgage and there was still a 1st mortgage $529,000 exceeding the value of the home. .

    I had a client lose a house to foreclosure back in my bankruptcy days. He described going to the auction and seeing this exact same type of thing occur–the buyer not being aware that the DOT being foreclosed was a second.

    I wonder how common that is?

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  24. Eric

    The following website is useful to get info on many of the properties that go to auction in Bellevue: http://www.northwesttrustee.com It will show a picture of the property, auction date and starting bid the evening before or morning of the auction. But you need to do your own research with regard to liens, etc.

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  25. Kary L. Krismer

    By hp @ 24:

    One of the things you need to know is you will usually not get it for less than the amount pending on the first lien. There are tax advantages that banks have if they buy it for the value of first lien note and sell it as REO on the MLS at a loss.

    I doubt there’s a tax advantage, because it’s a loss either way, but many of these loans have some sort of insurance that might affect the decision.

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  26. TheAceMan

    This is some great information. Thanks to everyone who has posted so far.

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  27. Kary L. Krismer

    One thing I would add is I’ve received conflicting information on the willingness of title insurance companies to issue title insurance on these sales. I’ve never had a client buy at one, but when I had a neighbor looking into one I tried unsuccessfully to get him an answer. He changed his mind on the purchase, so I never got to the end of the process, but when a title rep tells you they don’t accept money for something, that’s probably right! ;-)

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  28. joe dirt

    I bought a foreclosure through “buywaforeclosures.com”. They charge only $3500 to help you through the process. Worked out very well for me and am planning on getting another.

    Knowing the condition is valuable, suggestions:

    Track houses that are MLS listed as short sales, or pictures show they are empty or rundown. Probability is good these will end up at the auction later, so if you are interested in the propety you will be able to inspect it while it has a lockbox.

    Many times I’ve found that you can inspect abandonded houses because they are not secured: doors unlocked, garage doors not locked, windows open or broken. At least look in the windows to see if has been stripped. Talkative neighbors are useful also.

    PS, I wouldn’t be surprised if some investors at the auction have picked the lock on these empty houses since nobody would really care and it could be a big financial advantage.

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  29. Kary L. Krismer

    RE: joe dirt @ 30 – Keep in mind that the owner doesn’t have to leave until 20 days after the sale, and they could damage the house in that interim period.

    Also, a house that is not locked up would be particularly at risk.

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  30. joe dirt

    RE: Kary L. Krismer @ 31 – Good points Kary.

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  31. Jesse D. Moore

    3 knowledgeable agents commented at different times independent of each other = advertising shotgun blast? We’re tech savvy and we share posts of interest with each other, but that doesn’t mean that we conspire to take over the world through commenting on Seattle Bubble. We’re definitely passionate about what we do, and we’re not spammers. I don’t call my team members to see what they’re going to wear in the morning, neither do I tell them when and how to respond to your blog posts.

    In short, if you provide a post with only basic information on a topic that is laden with risk, reward, and controversy, you’ll get comments from the knowledgeable and ignorant alike, both just as passionate. I appreciate you leaving my link in the original comment, as it’s not an intent to advertise, but an attempt at brevity.

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  32. Jonness

    By Jesse D. Moore @ 33:

    3 knowledgeable agents commented at different times independent of each other = advertising shotgun blast?

    9.Dennis » Jan 18, 2011 at 6:03 pm
    11. Grant Weaver » Jan 18, 2011 at 6:13 pm
    12.Jesse D. Moore » Jan 18, 2011 at 6:14 pm

    3 posts from 3 different agents we’ve never seen post before post within 8 minutes of each other. All work for the same company.Tim allowed 99% of the content and removed one instance of personal contact information.

    I enjoyed the content you guys, but it did come off as a bit of a shotgun blast straight out of nowhere.

    If you have questions or are interested in coming to our class please contact me at [advertising deleted].

    Is that not an advertisement?

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  33. Jesse D. Moore

    RE: Jonness @ 34 – I don’t disagree with you, just merely explaining that it was not intentional or contrived. The reference that your quoted was not mine, and the timing was coincidence.

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  34. hp

    RE: Kary L. Krismer @ 27 – Yep – good point, the mortgage insurance does play a role too. Either ways, that’s what I have observed that the banks buy it back on their books at the auction for the pending amount of first lien.

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  35. Seattle Real Estate: A Hot Market or a “Terrible Idea”? | The SunBreak

    [...] 11.6 percent year-over-year, and foreclosures are 17 percent of all resales. (Seattle Bubble hasforeclosure shopping tips for you.) Not grim enough? Trulia just announced “Seattle is second worst city to buy versus [...]

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  36. David Fike

    Although I know it’s a little late to post this, I have a question and the people posting sound well educated.
    My home is going on the auction block.
    What percentage of homes sell the first time at auction & if it is not sold, how long before the next time it goes to auction?
    Also, not to be rude but, we are committed to follow through to the fruition of the foreclosure, so I’m not really interested in hearing how I can “save” my home.

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  37. toad37

    RE: ray pepper @ 17

    This is great information. Thanks Ray. Would love to hear any updates on how you see this process going these days.

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  38. Troy

    RE: David Fike @ 38

    Did your house sell? I’m in the same situation!!

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