Buying & Selling Houses

The 5 Biggest Risks of Buying Foreclosures at Auction

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3 Articles Written
Close up Conceptual White Miniature House on Top of the Table Beside Court Gavel.

After the housing crash in 2008, home building was a dying business—one that my partners and I needed to replace with a new source of revenue. With our experience, flipping foreclosures seemed like a relatively easy way to make money. Considering how fast home values fell, we thought we'd be able to jump in and land some great deals right away.

We thought wrong.

After weeks of searching the MLS for foreclosed properties and writing hundreds of offers, we had yet to buy a single foreclosure. We were starting to feel like foreclosures were a waste of time.

Finally, thanks to a partner’s chance discovery of a foreclosure that wasn’t listed on the MLS, we realized we had been looking in the worst place for deals on foreclosures. We were competing with countless buyers when the real deals were closing much earlier in the process at auction.

It’s only the properties that fail to sell at auction for one reason or another that turn into REO foreclosure listings. If a bidder buys a foreclosure on the courthouse steps, that property will never hit the MLS—at least not until the buyer is ready to resell it.

Ultimately, we did buy the foreclosure my partner found the day it was auctioned off. After that, we bought several more. We sold these properties for significant profit and built a new business based on these successes.

The process seems somewhat simple now, but looking back, it definitely didn’t feel like it at the time; it was confusing, and I was constantly worried that we were just one costly mistake away from failure.

Related: How to Successfully Market to Homes in Pre-Foreclosure

The Risks of Buying Foreclosures at Auction

If you’re a new investor or new to foreclosures, it’s important to remember that buying property at auction is risky. Things can go wrong, and when they do, they can cost you big.

But that’s not to say that you shouldn’t pursue foreclosure flips as an investment strategy. What I’m saying is that you should know what you’re doing first.

The best way to mitigate risk with foreclosure purchases is to hold off on buying until you truly understand the process. In our upcoming book, Bidding to Buy, we detail the foreclosure process and the pitfalls to avoid when bidding on distressed property.

Below, I highlight five of the biggest risks associated with buying foreclosures at auction and offer ways to mitigate these risks based on over a decade of experience and 700-plus successful foreclosure flips.

Foreclosure Sold For Sale Real Estate Sign in Front of House.

Risk #1: List Accuracy

Auction notices are typically printed on paper and posted at courthouses. While this low-tech approach to auctioning off foreclosures is slowly improving, most bidders still get information on properties from foreclosure list services. In most cases, the businesses offering these services resell information after gathering printed data and digitizing it.

The problem with this is that the process of digitizing property information is prone to human error. Prices may not be accurate. Addresses might be wrong. I know of people who have bought the wrong property due to list inaccuracies, so it’s crucial to scrub property information for mistakes before bidding at auction.

Related: How to Buy a Foreclosure: A Guide for Finding & Landing Foreclosed Deals

Risk #2: Property Condition

When buying a home at auction, it’s impossible to know the true state of the property. Unlike REO sales, you won’t have a chance to walk through the home or have it inspected. Plus, it’s not uncommon for owners to trash a place after defaulting, so there’s always a chance that properties bought at auction will need some serious work.

Since there’s no way to know the true condition of properties you bid on, you mitigate this risk by pricing the work they may need into your calculations. By doing this, you don’t need to worry as much about overpaying for a place that may need tens of thousands of dollars in work before it’s ready for resale.

Risk #3: Occupancy

Properties sold at auction may still be occupied. If you buy a property that’s occupied, you’ll need to have the occupants evicted before moving forward. Depending on state law and other factors, this can really slow things down. Previous owners may even file lawsuits against lenders. When this happens, houses can be tied up for years.

While there are potential upsides to buying a foreclosure with occupants, a less risky approach is to buy unoccupied properties. To determine occupancy with relative accuracy, you need to do a drive-by inspection.

couple on laptop, on holding gavel, online auction concept

When at the property, look for obvious signs of occupancy, like cars in the driveway. For additional assurance, try knocking on the door or speaking with neighbors. Another trick is to turn on an outdoor tap to help determine if the water has been shut off.

Even with no signs of occupancy, there’s always a chance that someone is living in a property. Still, with our drive-by process (which is detailed further in Bidding to Buy), we’re able to determine occupancy correctly about 90% of the time.

Risk #4: Clear Title

Remember earlier in the article when I said you should hold off on buying properties at auction until you understand the foreclosure process? Here's why: It's not always a simple process involving missed payments on a single mortgage. In other words, there can be more than one lien on a home.

While some liens are extinguished in foreclosure, others will need to be paid by the new owner. If you buy a property at auction without exploring its title and financial history, you may find yourself on the hook for unpaid property taxes, junior liens, and other unexpected fees. Always do a thorough title review on properties before bidding to avoid any nasty (i.e., expensive) surprises down the line.

Risk #5: Valuation

Bidding too much for foreclosures due to inaccurate valuations is one of the most common mistakes new investors make at auction. But since you never know the true condition of a property offered at auction, it’s hard to estimate value accurately with the same methods used for listings in the MLS.

Fortunately, there are ways to avoid overpaying for a foreclosure even without knowing its condition.

In an upcoming article, I’ll detail the tools and strategies we use to make educated guesses on the value of foreclosures sold at auction. While it’s impossible to know exactly how much to bid on a given property, getting close enough to secure profitability at resale is definitely doable.

Bidding to Buy: A Step-by-Step Guide to Investing in Real Estate Foreclosures by David Osborn and Aaron Amuchastegui is available now in the BiggerPockets Bookstore.

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Do you have questions on the risks associated with buying foreclosures at auction?

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David Osborn has completed more than 1,000 real estate deals over the course of 25 years, including single-family, multifamily, development, and private equity investments. He is The New York Times...
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    David Pere Rental Property Investor from Oceanside, CA
    Replied 2 months ago
    @David Osborn great article brother!
    David Osborn Investor from Texas
    Replied 2 months ago
    Thx David
    Wenda Kennedy JD from Nikiski, Alaska
    Replied 2 months ago
    My old business partner and I bought foreclosure sales at auctions and from private parties for years. At that time we called them Equity Purchases. One buy comes to mind. The foreman of our crew called to ask, "What do you want me to do with the tree growing in the kitchen? Yes, there was a tree, several feet high, growing up through a huge hole the kitchen floor. The interior of that house wasn't any better. Surprise, surprise! It's a rough-and-tumble business. We made a lot of money during those years and we lost money on some of our deals. It's a business that has many risks. It can make wonderful profits IF you learn the business and then really work it.
    David Osborn Investor from Texas
    Replied about 2 months ago
    Wow, a tree in the kitchen, that is a new one
    Mark Sanner Flipper/Rehabber from Quincy, MA
    Replied 2 months ago
    @David Osborn In Massachusetts there's another hazard to buying occupied properties at foreclosure auctions: You can't buy title insurance. The title companies spent so much money in MA mostly on legal fees fighting reluctant occupants (not just owners, but tenants and sqatters as well) that they no longer sell title insurance for occupied properties purchased at a foreclosure auction.
    David Osborn Investor from Texas
    Replied 2 months ago
    Wow, good to know. Thx for sharing Mark
    Peter Walther Specialist from Winter Springs, FL
    Replied 2 months ago
    I believe the problem with getting title insurance on foreclosed property in MA had more to do with errors in the foreclosure process it self not because of occupancy issues since the title policy would just take exception for parties in possession.
    Christopher Stacy Rental Property Investor from Wiesbaden Germany
    Replied 2 months ago
    Great article David! My first purchase was a foreclosure and I still have it as a profitable rental over 10 years later! Can't wait to read your book. Thanks!
    David Osborn Investor from Texas
    Replied about 2 months ago
    Great!
    Edward Brown
    Replied 2 months ago
    Don't forget about potential IRS liens where they have a 120 day right of redemption, so your hands are pretty much tied for 4 months before you can move forward.
    Jerome Kaidor Investor from Hayward, California
    Replied 2 months ago
    During the recession, it was perfectly possible to buy foreclosures off the MLS. I got my house - the "Half Price Mini Mansion", in 2011. Other people weren't interested because it was a mechanics special. Appliances, air conditioners, a furnace, shower heads, bathroom light fixtures - had all been removed. But none of that was scary - no foundation damage, no leaks of any kind, no dry rot, no termites.
    David Osborn Investor from Texas
    Replied about 2 months ago
    Nice, sounds like you made a good purchase
    Timias Woods Rental Property Investor from Los Angeles, CA
    Replied 2 months ago
    David, thanks for the tips you provided in the article. I am looking at foreclosure auctions as a strategy and this was really helpful.
    Asha Olivia
    Replied 2 months ago
    Thanks for the great article! Can you update us when the book comes out?
    David Osborn Investor from Texas
    Replied about 2 months ago
    This fall,
    Damon Poquette
    Replied 2 months ago
    Thank you David for your first of hopefully many articles written in the BP forum. Lovin' your books and your collaboration with Pat, Hal and the other GoB guys!
    David Osborn Investor from Texas
    Replied about 2 months ago
    Thx Damon
    Mark Sewell Lender from Houston, TX
    Replied about 2 months ago
    Thanks for this article - buying properties at auction seems like such a black box that is hard to decipher.
    David Osborn Investor from Texas
    Replied about 2 months ago
    Look forward to hearing your thoughts after you have a chance to read our book. Launch is scheduled for early fall
    Nancy Bender Investor from South Carolina
    Replied about 2 months ago
    Looking forward to reading your book. I have bought a few short sales and auction properties, not fully understanding what I was doing! What are your thoughts on pre-foreclosures? It seems that is where the best profits can be found from what I have been reading. I have been trying to figure out that process.
    Symone Fisher New to Real Estate from Miami, FL
    Replied about 2 months ago
    Thank you for the information, David, it is greatly appreciated. I am looking into purchasing Foreclosures (and Pre-Foreclosures ???) and as a newbie need to learn everything I can. At the end of this article you state: "In an upcoming article, I’ll detail the tools and strategies we use to make educated guesses on the value of foreclosures sold at auction." Has that article already been posted? I look forward to your book coming out in August!
    Symone Fisher New to Real Estate from Miami, FL
    Replied about 2 months ago
    I think I just found your new article, posted today: https://www.biggerpockets.com/blog/buying-foreclosures-auction-how-to-avoid-overpaying