When a foreclosing bank is the successful bidder at the foreclosure auction, the bank can list the property with a local realtor to sell the property or the bank may instead decide to list the property with a foreclosure auction company that auctions properties through an online auction process. In the latter, the bank has a minimum reserve price which means that the bank will not accept a bid for less than its minimum reserve price. Because the online auctions are relatively new, many real estate attorneys are unfamiliar with the various protocols and the issues that may arise. Each site is different and has many terms and conditions. Some companies do not fully disclose all relevant facts and may charge a commission to the purchaser, who must pay it at time of closing. This commission can be as much as 5% of the winning bid amount. Additionally, many online foreclosure auction sites are owned and operated by companies in other states which can be an issue if you have been wronged by the company and want to sue it for breach of contract and/or fraud. New York has what is referred to as a "long arm statute" which subjects foreign companies to the jurisdiction of New York courts so long as the transaction arose out of minimum contacts with New York State. The application of the statute is heavily dependent on the facts of each case. Additionally, many online auction companies contract with an "escrow agent" or title company that acts as an intermediary for the successful bidder and the bank that is permitting the property to be auctioned off. This escrow agent may not always act in the best interest of the purchaser and it is vital that an attorney experienced in these matters be retained to represent the successful purchaser. What is of further concern is that the escrow agent will be accepting the down payment at the time of the winning bid and the balance funds at the time of closing. These funds are not protected against the agent's misappropriation. Unlike New York, many states permit the escrow agent's insurance provider to issue a "closing servicing letter" or 'closing protection letter" to the purchaser. Such a letter insures the purchaser against any misappropriation of the funds while in the custody of its escrow agent. This is very important coverage, but the New York State Department of Insurance has not approved such letters in this state, and the letter cannot be issued in New York. Consequently, the winning bidder will have little or no recourse against an escrow agent's misappropriation of funds or if the agent goes out of business. It is, however, uncommon for escrow agents to misappropriate escrow funds or go out of business over night, but I can assure you that it does occasionally happen, and when it does, it can be disastrous for the purchaser. Perhaps New York State Department of Insurance should jump on the band wagon and do what most other states have been doing for many decades. Until then, the winning bidder must accept the risk. Unfortunately, there are other risks involved in these auctions and a winning bidder would be wise to retain an experienced foreclosure attorney to minimize such risks.
Arnold M. Bottalico is an experienced Long Island, NY foreclosure attorney with over 25 years of experience, and he welcomes your questions and comments.