Buying property at a foreclosure auction sounds like a great strategy for finding a deal—but it’s not always a cut-and-dried process.
For those thinking of looking at foreclosed properties or those who have tried and not been successful at it, information in this article will help you decide if foreclosure auctions are a viable route to homeownership and, if they are, how you can navigate the process successfully. Here’s how to buy a house at auction.
How do homes end up at an auction?
When a homeowner fails to pay their mortgage, then the loan falls into default and eventually the house falls into foreclosure. Prior to the foreclosure sale occurring, the homeowner can either (a) try to negotiate with the bank (e.g., move missed payments to the end of the loan term, work out a payment plan to pay the missed payments over time, etc.); (b) refinance the loan with another lender, which will pay off the foreclosing lender; or (c) pay the remaining balance of the loan.
Absent any of these options occurring, the bank will put the house up for sale at a foreclosure auction with an auction house. The bank is the seller in this scenario, and their main goal is to recoup the loan amount—the balance due on the loan—plus other expenses, such as those associated with the foreclosure process.
How does a foreclosure auction work?
The homes that are up for sale at a foreclosure auction are usually advertised both in the local newspaper and online. Depending on the area, the announcement may be up for a month or less. An internet search will show websites that have foreclosure auction listings.
An auction can be in person or online. In-person auctions are usually at the local courthouse, and anyone can attend for free. Online auctions are obviously quite different. They are done via a website, so participants need to register. There might also be a fee on top of the sale price.
First, an important myth buster
Buying a property at real estate auctions, especially in today’s market, doesn’t necessarily mean that you will be able to “steal” the property at a big discount. Currently, the number of foreclosures in the United States is at its lowest point since the Great Recession. Lenders are holding fewer foreclosed properties, and they aren’t going to give away anything.
A foreclosure auction also does not mean that the prices of the homes are lower than market value. One, the homeowner/borrower may have borrowed the maximum allowed by paying very little down on the initial mortgage balance. Two, by the time a property goes on auction, significant additional fees may have been added to the loan balance.
All of this doesn’t mean that you can’t find a great investment property in foreclosure; it just means you need to do your homework, have reasonable expectations and do due diligence.
Where are the foreclosures?
In the current market, it is not necessarily easy to find foreclosures; nationwide, foreclosures are down 76% from the high of 2.9 million in 2010. But they are out there. Real estate agents well-versed in foreclosure properties and auctions can be a valuable resource and can point investors to the right properties.
The following states have the highest foreclosure rates:
- New Jersey
- South Carolina
- New Mexico
- New York
More on buying foreclosures at auction from BiggerPockets
Risk-free (and mostly free) ways to learn about foreclosures
For investors new to buying real estate at foreclosure auctions, and especially investors new to buying real estate at all, it is easy to become overwhelmed with the process. After all, there is a lot to know and a lot of risks involved.
With a little bit of education and preparation, bidding on foreclosures becomes much less risky, and the potential rewards certainly can outweigh the inherent risks.
Everyone was a beginner at some point, but with time and experience, newbies can catch up to seasoned investors. Know that it is a constant learning process that gets easier with time, and each experience is a chance to learn something new and improve as an investor.
As with any new endeavor, investors should not let fear or doubt paralyze them. The only way anyone ever progresses is by taking action, but that means slow, steady, thought-out steps toward the goal. Sprinting toward that first foreclosure purchase is going to lead to burnout, and investors can easily burn through their funds as well.
With that in mind, here are four risk-free ways to start learning the tools of the foreclosure trade. There is no harm in trying these out, and it could help to overcome those feelings of self-doubt and uncertainty.
1. Learn about the foreclosure process
It may come as a surprise, but there have been countless instances when an investor sets their sights on one property scheduled for sale only to find that it was never actually put up for auction.
It’s a good idea to learn about the foreclosure process to keep from being caught off guard by the often complex path homes take toward auction. Better yet, learn about the process of buying foreclosures at an auction.
There are also numerous books that are great resources. Bidding to Buy outlines each step needed to buy distressed properties on the courthouse steps. It is available for buy on the BiggerPockets Bookstore.
Plus, with each purchase, the authors give access to the same resources they use throughout their process, including spreadsheets and checklists.
2. Realistically price/value the target home(s)
All investors occasionally (or even frequently) like to fantasize about buying a house for the lowest price possible and then selling it for the highest price possible. However, being realistic will save you a lot of grief. And money.
Visit real estate data sites like Realtor.com and Zillow to find quick value estimates of a property in which you are interested. After that, think about how much a bid should be on the property in order to turn a nice profit at resale.
Oh, and don’t forget to factor in realtor commissions and repair costs.
3. Price/value other properties
Pricing (or valuing) one’s own home obviously is a lot easier than pricing someone else’s property. After all, homeowners know the condition, improvements and repair requirements associated with their home.
Further, when a home is for traditional sale, it is typically easy to take a tour of it, in addition to having the ability to obtain a home inspection.
Unfortunately, this type of information will not be available for most foreclosure homes. If information is readily available, it is wise not to trust it, as the condition can change drastically between a property’s last sale and foreclosure.
For practice, try valuing some properties that have recently sold. Do this before looking at sale figures. Then, go back and see how close your estimates were compared to what the properties actually sold for.
This exercise will help you gain competence with estimating property values. It’s a critical skill for any real estate investor, and it’s absolutely vital when it comes to being the winning bidder on foreclosures at an auction.
4. Attend a foreclosure auction
Finally, why not attend a foreclosure auction? It’s free (in person), it’s fun and there’s no purchase necessary.
Attending an auction without the intention to buy is a great way to understand how they are run. There is no pressure, so it’s much easier just to take in the experience. When the day to place a first bid finally arrives, you’ll have much more confidence and can focus on securing a great deal instead of trying to figure out what’s happening.
Follow these four risk-free ways to start learning the ropes. Anyone can do them.
The time will come when learning will be over. When it does, you’ll need to head out into the big, brave world of The Real Thing. However, never forget that risk and reward are conjoined twins.
For now, though, take a baby step by attending home auctions. There’s nothing else like it, and it really is fun.
Navigating the foreclosure auction process
Below are general tips that are helpful to real estate investors in all 50 states.
Step 1: Know the foreclosure laws in your city, county and state.
Each state has its own laws governing foreclosures. There are two general formats: judicial and nonjudicial foreclosures. In judicial foreclosure states, the process is handled through the courts. In nonjudicial foreclosure states, the process is mostly handled outside of the courts, because the process is normally faster and less expensive. However, the lender may have the option of pursuing foreclosure through the courts and will do so under certain circumstances.
Another critical factor that varies by state is the foreclosure redemption period. This is a designated period during which the owner can redeem the property. If there is a redemption period, the buyer generally cannot do anything until it expires. For example, the buyer may not evict tenants or collect rents during this period.
Step 2: Find out about the auctions.
Investors can search the internet for foreclosure auction listings in their area. Better yet, try to buy a property before the foreclosure goes to auction. Once it gets to auction, the competition will be much more intense and the price is likely to be higher.
Step 3: Never buy sight unseen.
Whenever possible, get a professional inspection. This gets a bit tricky because buyers usually cannot do any type of inspection before the auction. It is imperative that the contract provides for an inspection before it is a done deal. Make sure the offer includes a “subject to” clause that will allow buyers to get an inspection.
Step 4: You are buying “as-is”—and it really is as-is.
Foreclosure properties are likely to be in bad shape. The owners, if they are still on the property, have long since lost any motivation to keep up with repairs and maintenance, and it is not uncommon for them to become destructive. Know that this is a possibility going in.
Step 5: Check for claims, liens and occupants
A word of caution: buying a foreclosure at auction comes with a high level of risk. It is important to do your homework and consider the following:
- Does the property have liens, multiple mortgages, code violations or other issues?
- Are tenants or the former owner still occupying the property? Who will be responsible for evicting any occupants?
- It is a requirement to pay cash, such as with a cashier’s check, within 24 hours. If there are problems found with the property, the buyer still owes the money.
Step 6: Have the cash ready.
The market is very competitive, and bidders paying all cash will win out. This means bidders need to put down a deposit at the auction and close soon after.
A buyer that uses financing must prove they can close to have any chance of being the highest bidder.
Step 7: Understand financing restrictions.
Investors often run into the following quandary: the bank that owns the property won’t pay for repairs, but the bank that the investor wants to get a loan from won’t lend unless the repairs are done. In this situation, investors can look into a 203(k) loan from the U.S. Department of Housing and Urban Development or a private money loan.
Step 8: Wait for the certificate of title.
The buyer with the winning bid will receive the certificate of sale as soon as they have paid up, but the certificate of title will take a couple of days. This means that the house can be taken away during this period. For example, if the original owner pays off the loan, they’ll still have the rights to the property. After the buyer has possession of the certificate of title, the property is officially theirs, and they can start work on it.
If you’re considering foreclosure auctions as a source of potential investment properties, make sure you know how they work. As a strategy, look at foreclosure auctions as a potential source for finding a great investment property, not as a place to find a killer deal. As an investor, you have to be willing to accept the risks associated with foreclosure properties. Do your homework to mitigate as many of those risks as possible.