Buying property at a foreclosure auction sounds like a great strategy for finding a deal. If you’re thinking of using this strategy or have tried and not been as successful as you’d like, then reading this article will help you to decide if foreclosure auctions are right for you and, if they are, how to navigate the process successfully.
First, an Important Myth Buster
Buying a property in foreclosure, especially in today’s market, doesn’t mean you’ll be able to “steal” the property at a big discount. The number of foreclosures is at its lowest point since the great recession. Lenders are holding fewer foreclosed properties and they aren’t going to “give away” anything.
If you think you’re going to get a steal of a deal by going to foreclosure auctions, you’ll be disappointed. By the time a property goes on auction, the price will have risen due to additional fees. All this doesn’t mean that you won’t find a great investment property in foreclosure; it just means you need to be realistic about the price you will pay.
Where Are the Foreclosures?
It’s not easy to find foreclosures in the current market, but they are out there. Nationwide foreclosures are down 76% from the high of 2.9 million in 2010. That said, if you happen to live in one of the following states, you may have better luck—or at least more to choose from, as they have the highest foreclosure rates:
- New Jersey
- South Carolina
- New Mexico
- New York
A Few Tips for Navigating the Foreclosure Auction Process
I’ve included general tips that are helpful to real estate investors in all 50 states and a few state-specific tips for Minnesota.
A word of caution: Buying a foreclosure at auction comes with a high level of risk. 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?
- You’ll be required to pay cash within 24 hours. If there are problems, you’re left holding the bag.
Tip #1: Know the foreclosure laws in your city, county, state.
Each state has its own way of governing foreclosures. There are two general formats: judicial and nonjudicial foreclosure states. 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 it’s usually faster and less expensive. However, the lender usually has the option of pursuing foreclosure through the courts and will do so under certain circumstances.
In Minnesota, the primary method of deed of trust foreclosure is non-judicial.
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, your hands are generally tied until it expires. For example, you may not be able to evict or collect rents during this period.
In Minnesota, typically there is a foreclosure redemption period. The period is usually effective for six months but can last up to a year. This means that you may need to wait for up to a year to get access to the property that you bought at auction. Throughout this time, the prior owner will be living in the property and likely ignoring maintenance issues as they know they will have to move out eventually.
Tip #2: Try to buy 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.
Related: How to Find Real Estate Deals Using Hubzu (& Other Online Auction Sites)
Tip 3: Never buy sight unseen.
Whenever possible get a professional inspection. This gets a bit tricky because you usually can’t 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 your offer includes a “subject to” clause that will allow you to get an inspection.
Tip 4: Know that you are buying as is—and they really mean “as is.”
Foreclosure properties are likely to be in bad shape. The owners, if they are still in 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.
Tip 5: Have the cash ready.
The market is very competitive, and cash buyers will win out. If you’re using financing, you must be able to prove you can close to have any chance of beating the competition.
Tip 6: Understand financing restrictions.
Oftentimes you can run into the following quandary: The bank that owns the property won’t pay for repairs, but the bank that you want to get a loan from won’t lend unless the repairs are done. In this situation, you can look into a 203(k) loan from the U.S. Department of Housing and Urban Development or a private money loan.
Related: I Almost Bought Properties at Auction: Here’s What Stopped Me
If you are considering foreclosure auctions as a source of potential investment properties, make sure you go in with your eyes wide open. As a strategy, you should look at foreclosure auctions as a potential source for finding a great investment property rather than a killer deal. Make sure you are willing to accept the risks associated with foreclosure properties and do your homework.
Have you purchased properties at auction? Any tips you’d add to this list?