Buying Property at a Foreclosure Auction. What Exactly Is It?

A few years ago I had the chance to review a mandate contract and to take part in an in-person meeting. I thought I would share the experience, because it was not without its lessons.

First, a small but important clarification. Buying property at a foreclosure auction is, in legal terms, not a sale and purchase, but acquisition through an official auction. This is not just wordplay. The difference matters from the point of view of both the process and the risks.

There are companies that entice prospective clients with the promise that they can acquire real estate well below market price at a foreclosure auction. This is possible in principle, but as we will see, the devil is in the details, and sometimes in the company itself.

How Does a Property End Up in Foreclosure? The Case of Alan and Bob

The process of buying property at a foreclosure auction is easiest to understand through a concrete example. Alan and Bob decide to build a family nest among the rolling hills of the countryside. They buy their dream farmhouse with a porch from its previous owners for a round 10 million forints. From the bank they take out a loan of 8 million forints, denominated, of course, in Swiss francs.

Alan and Bob live happily among the hills, paying their installments. Then disaster strikes, the franc’s exchange rate soars, the installment shoots sky-high, and the two of them suddenly cannot pay. The bank terminates the contract, and the entire debt, let’s say 28 million forints, becomes due at once. Naturally, they cannot pay it.

The bank starts debt collection, files a civil lawsuit, wins it, and on the basis of the final judgment requests enforcement. Since the couple has no other substantial assets, the property is placed under enforcement and put up for auction.

If someone buys the property at the auction, the enforcement officer takes their own fee from the proceeds and pays the rest to the bank. If the value of the property is higher than the bank’s claim, the couple also gets something. This, however, rarely happens.

Buying Property at a Foreclosure Auction, Then and Now. The Age of the Gentlemen in Black Sunglasses

In the wild capitalism of the 1990s, foreclosure auctions took place in person. The enforcement officer announced the auction for eight o’clock on a Monday morning at a given address, and the interested parties showed up.

The reader with a little life experience already suspects that in such situations the density of gentlemen in black suits and black sunglasses, with chests broad enough to put a wardrobe to shame, was considerably higher than average. If our friend Casey happened to wander in to close the property deal of his life, one of the aforementioned gentlemen would discreetly place a hand on his shoulder and, even from behind his sunglasses, signal his intentions with a meaningful glance. Casey, being a sensible man, took the hint and suddenly no longer wanted to acquire real estate quite so cheaply.

Fortunately, the legislature realized that this state of affairs was unsustainable. Today, auctions take place through the online system of the enforcement officers’ body. Anyone can register, bid anonymously, and does not have to face the gentlemen in black sunglasses. This is already far more civilized.

Buying Property at a Foreclosure Auction Through an Intermediary. Is It Even Necessary?

Back to the concrete case. My client had been offered help by a company, in exchange for an astronomical sum. The minimum fee was six figures, plus 5 percent of the property’s value, plus a success fee on top.

My first, non-legal question was why anyone would want to pay so much for a task they can do themselves. Searching among the properties up for enforcement, registering, and bidding do not require any special expertise, anyone can do it.

My second question was how a company offering a heavily overpriced service could possibly operate profitably. Do they press the bid button faster? Do they bid on properties that are not in the system? Does the bidding close a little later for them than for other mortals?

These suggestions, of course, do not point in the direction of lawful operation. My suspicion was dispelled neither by the managing director who showed up at the in-person meeting looking like a southern Italian crime boss, nor by the fact that the company’s name had cropped up near news about unfolding notary scandals.

The Mandate Contract, Every Clause of Which Worked Against the Client

The contract confirmed my prior expectations. Let’s look at the main problem points.

Point one. The mandate consisted of two parts, a preliminary market research and the bidding itself. The fee, however, was completely disproportionate. 50 percent of the mandate fee went to the preliminary market research, 25 percent to administrative fluff, and only 25 percent to the bidding itself. If we sign up but no suitable property turns up in the end, 75 percent of the fee still has to be paid, even though we get nothing in return. For an average city flat, this comes to nearly 2 million forints.

Point two. The mandate fee would also have been due in cases that arise through no fault of the client. If someone outbids us and the property is taken, 90 percent of the fee still has to be paid. The same applies if the enforcement officer cancels or annuls the auction.

Point three. In the event of an unsuccessful auction, the company would continue its activity free of charge for another six months, but the contract was so full of vague generalities that in practice not much would have followed from those six months. After the six months expired, the fee in the millions would likewise have been due.

Point four. The contract could also be ended by ordinary termination, but even then 50 percent of the mandate fee had to be paid. The summary, then, is short: the client is obliged to pay for everything, while the company is obliged to do nothing.

The Title Deed That Told the Whole Story

There was one more detail. The company had been offering the client a property that had already been auctioned off around ten years earlier. The price from back then, of course, seemed tempting, but the title deed clearly showed that the property had long since been in someone else’s ownership.

When I pointed this out to the company’s representative, they became indignant. The property’s auction was in progress, they said, we should go ahead and sign. I quietly remarked that the property was under auction to about the same extent that I am a member of the British royal family and practice law only as a hobby. Believe the title deed, not the representative, however convincing they may be.

In the end, no contract was signed. The client realized that this was not the company with which to make the deal of their life. Unfortunately, others were not so lucky. Some lost more than a million forints with this company.

Fun fact: out of curiosity, I looked up the company in the company register. Following a forced deletion, it is now under liquidation. It seems the business model was not so great after all.

Buying Property at a Foreclosure Auction on Your Own. What to Watch Out for if You Still Go for It

If, rather than through an intermediary of dubious reputation, you would like to buy property at a foreclosure auction on your own, this is possible in principle, but it requires careful consideration.

Buying property at a foreclosure auction fundamentally calls for an investor’s mindset. You have to pay almost immediately, but when you actually take possession can be pushed back by years. If you are looking for a home for your own use and need to move in now, this is not the best solution.

The other major risk is that in many cases you cannot view the property at all before buying. What you buy is not necessarily what you imagined.

If you do go for it, the very first step should always be to obtain the title deed. It shows who the current owner is, whether there are any encumbrances, and whether the auction really is in progress. Believe the title deed, not the promises.

If you have a question about buying property at a foreclosure auction or any other real estate law matter, feel free to get in touch. Book a consultation, and together we will review your options.