When a property owner is no longer able to finance their family home or apartment, a foreclosure auction occurs. This offers prospective buyers unique opportunities to acquire properties below market value. In addition to the numerous advantages that result from buying a foreclosed property, potential bidders and interested parties should also find out about the process, legal obligations and risks and include these in their decision-making process. Read in our guide article useful information and tips for buyers and interested parties on the subject of real estate foreclosures.

The most important questions in advance:

Who can bid in a foreclosure auction?
Foreclosure auctions are publicly available. This means that basically anyone interested can participate and bid. The prerequisite is that the buyer has full legal capacity, i.e. over 18 years of age.

How do you find out about foreclosures?
Information on dates, locations, etc. is published on the federal or state justice portal. As a rule, you can also view the corresponding market value reports in the auction file here. You can also obtain information about future dates from the foreclosure department of the responsible auction court (the district court in whose jurisdiction the property to be auctioned is located).

What should you look out for before the foreclosure auction date?
First of all, you should get comprehensive information about your desired property (condominium, commercial building, single-family home, property, …). An inspection can be an advantage. But be careful: Buyers are not entitled to view the house from the inside.

When can bids be submitted for the property?
Bids can only be submitted during the actual foreclosure auction, as soon as the Rechtspfleger has opened the bidding hour.

Which bids are allowed?
Only bids whose amount reaches or exceeds the minimum bid will be allowed.

Which bid will ultimately win?
At the end of the bidding hour, the bidder who ultimately submitted the bid with the highest permitted amount during the auction will be awarded the bid.

When is no contract awarded?
If the highest bid is less than 70 percent (7/10 limit) of the market value of the property, the obligee can request that the bid not be awarded and a second date will take place. If the highest bid is even less than 50 percent (5/10 limit) of the market value at the first appointment, the court may not award the bid to protect the owner. If there is no knockdown on the first auction date, both the 7/10 and 5/10 limits are no longer valid for the second auction date.

1. Why are properties being foreclosed?

A foreclosure auction is an enforcement procedure that is set up so that the creditors’ bills can be paid when the debtor cannot. If a debtor can no longer or does not want to pay bills and loan installments for his apartment, property, family house or commercial building, for example in the case of personal bankruptcy, creditors can apply for a foreclosure sale to the local court. The auction proceeds, minus the procedural costs, will then be used to settle the outstanding debts. The current market valuethe property is determined in advance by an expert from the court in the form of a market value appraisal. This is a valuation of the average price that could be achieved in free sale.

Right of residence in foreclosure sales of real estate

In the case of a property with a person entitled to live, the right of residence of the person entitled can expire as a result of the foreclosure auction. The creditor who obtains the foreclosure auction of the property must be higher in the ranking class according to § 879 BGB than the person entitled to live, so that the right of residence expires. If the right of residence is canceled, the person entitled to live receives, according to Section 92 (2) ZVG , a settlement from the auction proceeds, the amount of which is based on a comparative rent. Here, too, the beneficiary must be higher in the ranking than other creditors. The severance payment is limited by the average expected time of death of the beneficiary.

2. What are the opportunities and risks for buyers?

In principle, a foreclosure auction procedure is an attractive option for prospective buyers to acquire real estate cheaply. In addition to the numerous opportunities, there are also risks that can complicate the acquisition of this property. In order to enable a smooth process, future owners should inform themselves in advance about possible stumbling blocks and avoid them by means of good preparation and goal-oriented communication.

opportunities

  • Low prices in foreclosure proceedings: Experience has shown that the final sales price, for example for a two-family house, is well below the estimated market value of the property. This is especially true for an auction in the second date, as both the 7/10 and the 5/10 rule do not apply here.
  • The ancillary purchase costs for foreclosures are significantly lower compared to a normal property acquisition: There are no notary fees and no broker’s commission for foreclosed real estate.
  • In the case of foreclosures, the district courts attach particular importance to transparency: Even before the auction date, prospective buyers can easily inquire about all burdens and liabilities that may still be attached to the property. An appraisal is also available in which construction defects are mentioned, if applicable. In many cases, you do not have to carry out extensive research if the available documents are meaningful.

Risks

  • There is no entitlement to a previous inspection, no right of withdrawal and no guarantee in the event of defects. Old tenants or owners do not have to let prospective buyers or appraisers appointed by the court into the apartment or house. In Germany, prospective buyers and appraisers have no legal right to inspect the property to be auctioned. Therefore, in case of doubt, only an inspection from the outside is possible, whereby considerable defects cannot always be recognized. This could lead to considerable costs later on for the buyer.
  • Every bid in the foreclosure auction of real estate is binding and cannot be withdrawn. A bid that has already been submitted is legally considered to be a contract.
  • It is possible that the purchased property is not immediately ready for occupancy because it is still inhabited or rented by the owner.

3. What should bidders look out for in a foreclosure auction?

Prospective buyers should prepare well for a foreclosure auction so that they can make a well-considered decision and factor in potential risks before purchasing the property. Follow these 5 tips to help you prepare well:

  1. 1.Research: In the run-up, prospective buyers can find out more about objects to be auctioned and auction dates from the local courts and regionally from brokers in order to discover suitable objects. In the auction file you will find all the important information: land register entries, the market value appraisal of the property, building loads and the registration of claims. An auction date can also be canceled or postponed at short notice. It is therefore advisable to find out whether the foreclosure auction will actually take place at the competent local court before the scheduled appointment.
  2. 2.View the land register extract: Check the land register extract for possible contaminated sites or special rights of use by third parties that could encumber the property. Attention should also be paidto a possible land charge here. If, for example, several creditors are entered in the land register, they must either be paid out or taken over. If you are unsure about an existing land charge, you should be particularly careful at the beginning of the foreclosure auction. Here you will be informed again about the existence and scope of existing rights of creditors.
  3. 3.Appraisals study: In the report provided by the Court can be found not only the market value of the object, but also information on the location and stage of construction. A professional assessment of this report may also be useful.
  4. 4thInterior Viewing: The current owner is not required by law to let in potential buyers. The inspection ordered by the court is therefore often only from the outside. The prospective buyer can try before the viewing, in consultation with the previous owner, to enable an inventory of the inside. If it is not possible to view the interior, potential buyers should at least have the property assessed from the outside.
  5. 5.Financing concept: Consumers should have secured financing before purchasing. Because after the first bid, a security deposit of 10 percent of the market value must be deposited. Cash payment is excluded for the security deposit in the case of foreclosures. Interested parties can do this in the form of a crossed check, a guarantee or a transfer.

Reading tip

Land register and excerpt from the land register

4. What are the requirements for other bidders?

  • Legal capacity: In principle, anyone who is at least 18 years old can take part in a foreclosure auction. Persons with limited legal capacity are permitted provided their legal representative consents to the participation and submission of bids in the auction.
  • Security deposit: If requested by those involved in the proceedings, you must provide security to the auction court immediately after submitting your bid. The amount of the security deposit is 10 percent of the property’s market value. The security deposit can be paid in the form of a bank transfer to the court, a Bundesbank or crossed check or as a bank guarantee. Note that cash, savings books, securities, written confirmations from banks about account balances or personal checks are not permitted.

5. Which documents are required to participate in a foreclosure auction?

The following documents are required to participate in a foreclosure auction:

  • valid identity card or passport (a driver’s license is not permitted for identification.)
  • If necessary, a power of attorney or proof of representation (if you cannot appear in person for the auction, it is possible to send someone else to represent you. This person needs a notarized power of attorney to bid.)

6. What are the fees and costs involved in bidding?

You don’t have to pay any fees for the actual bidding. The auction court only charges fees in accordance with the Court Fees Act once you have won the bid for the property. The amount of the fees depends on the purchase price and the value of the encumbrances, for example land charges. In addition, the usual costs for the entry in the land register as well as the real estate transfer tax apply to the buyer. There are no brokerage or notary fees in a foreclosure auction.

7. What is the auction process like?

If you have arrived at the competent local court on the day of the foreclosure auction, you must first show your identity card and deposit the security deposit. During the auction, all essential information about the property (condominium, commercial building, two-family house, …) will be announced, including the determination of those involved in the proceedings. You will also find out at this point whether you might have to assume any debts on the property if you bid for the house. After that, the minimum bid and all further auction conditions will be announced. The bidding hour then begins. This must last at least 30 minutes, but can theoretically be any length until the last bid has been submitted. Bids are only permitted

What is a minimum bid?

The minimum bid, also known as a cash bid, is an amount of money that is determined by the responsible auction court. The minimum bid or cash bid is set so high that it covers all costs incurred for the foreclosure auction and the claims of the creditors.

5/10 limit

To protect the owner, at least 50 percent of the market value must be achieved on the first date of the foreclosure auction. If there is no knockdown on the first auction date, the 5/10 limit is no longer valid for the second auction date.

Who will be awarded the contract?

The person who has submitted the last and highest bid will be awarded the bid. The last bid is announced three times by the Rechtspfleger, who is asked to submit further bids. Only when no other interested party reports, the auction is closed and the highest bidder receives the bid for the object.

8. Tips for the right bidding strategy

If you are planning to enter into a foreclosure auction, the first thing you should do is to think about your tactics. For example, it can be an advantage if you set your personal maximum bid in advance. In the course of the auction it can easily happen that one can be tempted to bid higher. However, if you stick to your possible upper limit, you can be sure that you will be able to finance the purchased property as planned.

At the auction, you should first observe who your competition is and how they are behaving. The less competition, the higher the chance that you will be awarded the contract in the end. If there are several bidders, you should be careful not to enter the negotiation too low. Preferably choose an amount just below your own maximum bid in order to be able to shake off the competition as early as possible.

9. What happens after the foreclosure auction?

Whoever has submitted the highest bid at the end of the auction receives the bid and becomes the new owner in court. From this point on, the buyer has a maximum of six weeks to pay the price to the local court. In addition, a fee of 0.5 percent of the purchase price is due for entries in the land register. After the tax office has issued the clearance certificate, the new owner can be entered in the land register. A notarial certification is not necessary.

If the Auctioned house is uninhabited, the new owner can move in promptly. If it is still rented or occupied by the old owner, there may be waiting times or eviction is necessary in some cases.

Eviction at foreclosures

The buyer is entitled to enforce the eviction directly from the award decision. The effectiveness of the eviction can be instructed by a bailiff. Tenants or lessees of the auctioned property are excluded from this.

Conclusion

A foreclosure auction can be a unique opportunity for buyers to acquire real estate below its actual market value. But whether the purchase is really worthwhile in this way depends on the actual property and the final price. Buyers should be aware that they are buying property in a foreclosure auction at their own risk. Any warranty claims are excluded. If the purchased item has defects or damage, you cannot request a replacement. It is therefore particularly important to obtain all relevant information before the auction in order to be able to assess the risk precisely.

In addition to real estate from foreclosures, the purchase of investment properties is also a lucrative business. Read more about this in our advisory article.