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Real Estate Foreclosures

Why are real estate foreclosed?

Auctions in real estate (Versteigerung) always come with mixed emotions. For bidders it’s a happy occasion of having acquired a property very cheaply and for the previous owners, it shatters a dream since foreclosure auctions happen only if the owner has defaulted.

Usually, it’s the high debt of the owner which is the reason for foreclosure. If the owner is unable to pay monthly EMI’s, he/she can apply for bankruptcy at the district court. All the assets are sold to settle part of the debts in the district court. If he/she owns a property, they can sell it or the creditor can apply for foreclosure.

Which properties are foreclosed?

All immovable property, whether it is a house, an apartment or a plot. They’re sold to the highest bidder at a public real estate auction (Zwangsversteigerung) for as much profit as possible.  

What are the costs for the buyer in a real estate foreclosure auction?

A lot of times buyers expect to get a property at a very cheap rate in foreclosures. However one must be aware that a security deposit needs to be provided as a bidder. So please, inform yourself about your financing options, have adequate equity and please have a security deposit ready.

Check with your bank about financing options. Would you be given a specific amount of loan if you are awarded the contract for the foreclosed property? Have answers to questions like these so that eventually with a fixed purchase intention you are able to save 20-30% market value of the property. Then, the bank financing of the remaining sum will be realistically possible.

To enter the bidding process one must provide a security deposit which is usually 10% of the estimated market value of the property. You can write a cheque, by means of a bank guarantee or by transferring the amount to the court treasury.

Timelines are very important. The cheque must not be older than 3 working days, if you transfer the funds to the court treasury, you must do it 10 days before the auction. This security deposit is refundable if you do not win the contract for the property. However, if you win the contract there will be additional costs that you need to factor in. Real estate transfer tax of 3.5%,  costs for the entry in the land register and interest are applicable. The surcharge is also an additional cost but it is not applicable on the private purchase of a property. This is 1% of the total price which must be paid to the district court. Interest is charged at 4% from the day of the knockdown until the payment of the purchase price.

How does a real estate foreclosure auction work?

The date is set by the district court after the decision of the compulsory auction and the determination of the market value. The date is fixed at least six-eight weeks in advance. One can look at notices in the district court or Internet portals to get more information about the foreclosure dates in the region.

Everyone is allowed to participate in the auction since it’s a public event. To bid for a property there are certain criteria. The bidder must be 18 years or above, the bidder must carry a valid identity document, the bidder must also have transferred the security deposit to prove solvency.

Event pattern remains the same for years. First, the parties are introduced, relevant information about the property are also listed out, market value and the minimum bid is announced post which the bids can be submitted.

The official time for the bidding is 30 minutes but in some cases it takes much longer. If no further bids are submitted after the last one being announced thrice then the bidding process is over. Also, if the last bid is less than 70% of the market value then another auction can be requested. However, if the last bid is less than 50%, the contract will not be awarded. In the second auction these rules don’t apply.

You will get 4-8 weeks to pay the full amount if you’re awarded the contract. The previous owner must vacate the premises within this time frame. If the property was rented out then you will start receiving the rent. You will no longer be able to withdraw from this purchase contract so think carefully before bidding for a condominium or a two family home.

Advantages: Purchase property from foreclosure

While a few of you may get lucky at times for picking up a property far below the market value, you must be very very careful before submitting the first bid.

There is a process that you will need to understand before you get too excited about a property. First you will need to study the documents about the property which also includes an independent report that is made before an auction. The report is made by an independent expert commissioned by a competent local court. This report has an accurate description of the property with all possible defects. This report is extremely important as the market value of the property is determined on the basis of this report. You will get a very clear picture of how much you will have to also invest in modernization. So please go through this report thoroughly.

If the highest bid is less than 70% of the market value, there will be a second auction, and if the highest bid is less than 50% of the market value the contract is not awarded. In the second auction, since these rules don’t apply a buyer can make a bargain if there is little interest in the property.

You will also enjoy the following benefits if you participate in a foreclosure auction:

  • The cost of the property may be substantially less than its typical market value.
  • No brokerage commission is charged.
  • A notary charge is not included.
  • Since the district court has already hired a surveyor, there is no need to show them the land.

However, there are also risks that you should consider before buying a house.

Disadvantages: What are the risks of acquisition by foreclosure?

Purchase of a foreclosed property involves dangers. You should educate yourself thoroughly and take some advice if you want to avoid falling into a trap. You must accurately assess the purchase of real estate rather than placing a bid “blindly.” The most important bit is financing and one must invest only when there’s absolute clarity on that.

Consider the following risks when foreclosing an object:

  • You cannot view the owners apartment or house and can only make the decision basis the information available and the external impression.
  • Even the district court expert does not have permission to enter the living space while determining the market value. The real state in the expert’s view may differ because the foreclosure process might take months or even years.
  • Once you bid you will not be able to withdraw from it. Do it if you’re absolutely sure that you can buy the property. You’ll only get the surety once you have clarified regarding the financing with your bank.
  • There is a risk of bidding a higher amount than your budget. If it gets accepted then you will not be able to withdraw from it. Be very careful.
  • If the former owner refuses to move out after you’ve bought the property you can enforce eviction. 
  • After buying the property, the former owner must move out. If the latter refuses, the new owner must enforce the eviction. Due to the insolvency of the preceding owner, additional fees may be applicable. If tenants occupy the unit, the lease is in effect until it is registered for personal use.
  • The rules of mangehaftung do not apply and the buyer is not entitled to a warranty. The buyer must pay for defects himself/herself.

So carefully consider whether the risks are worth purchasing a cheap foreclosure property. You ought to have a reserve of money set out for unforeseen repairs or remodelling expenses.