Lender Confirmation Auction

Lender Confirmation Auction

Investopedia / Theresa Chiechi

What Is a Lender Confirmation Auction?

A lender confirmation auction is a type of foreclosure sale in which the highest bid will only be finalized after it is approved and accepted by the mortgage holder. This differs from an absolute auction, in which the winning bidder automatically takes ownership of the property.

The lender confirmation auction is one of several varieties of property auction sales. Properties sold this way are generally in foreclosure. The previous owners have left, and the bank has become the sole owner.

Key Takeaways

  • In a lender confirmation auction, the winning bid awaits approval by the bank that holds the mortgage.
  • A lender confirmation auction is just one of many ways to buy properties in foreclosure.
  • Bids may be accepted before or during the auction.
  • By contrast, a short sale is negotiated between a prospective buyer and the bank.
  • A real estate-owned (REO) sale is another foreclosure sale, but an REO means the bank owns the foreclosed property instead of an individual.

How a Lender Confirmation Auction Works

A lender confirmation auction will be advertised as subject to lender confirmation. When it comes time for the auction, the event allows interested parties to place bids on the property until a high bid is received.

However, the sale does not automatically go through. First, the auction listing will show the status of a bid. A listing indicating a "bid pending confirmation" before the scheduled auction date means that a seller's "make an offer now" bid has been accepted condition on its confirmation. A listing of a "bid pending confirmation" after the scheduled auction date indicates that a bid on the property was accepted at the auction and is awaiting acceptance.

In a short sale, a property is owned (and maybe still occupied) by a seller, shown by a professional realtor, and the price is usually less than what is owed on the home. In a lender confirmation auction, the foreclosed property is vacant and owned by the bank.

Lender Confirmation Auction vs. Short Sale

 A short sale is another type of real estate transaction in which the purchase bid is subject to lender approval. The property is not sold at auction during a short sale. Instead, it is sold in an agreement negotiated between the seller and a buyer for a price that is less than the outstanding mortgage on the property.

In a short sale, the property is listed by a licensed realtor and shown to prospective buyers. The buyer may make an offer to the owner, who might be in default or near defaulting on the mortgage. In such cases, the lender must review and approve the transaction.

In a lender confirmation auction, the homeowner has been removed from the process. The foreclosure process has already been begun, and in most cases, the property is vacant. In this case, the lender has determined an acceptable minimum bid price that it will accept in order to move forward with the transaction. 

Special Considerations

Another variation of the foreclosure sale is the real estate owned (REO) sale. In this case, the bank has already processed the foreclosure and taken ownership of the property. In most cases, the property is being maintained by a management company working on behalf of the bank.

Since the REO process can be prolonged, it is not unusual for the property to be in poor condition or badly damaged. As with short sales, REO properties are listed for sale, and prospective buyers inspect them and decide whether to put in an offer. Generally, the bank has already determined the amount it will accept. The terms of the purchase are "as is," and the bank retains the right to refuse to make any repairs.

Buyers of REO properties are often investors who purchase damaged properties to repair or update them and sell them for a profit. This practice is commonly referred to as flipping in the real estate industry.