Real Estate Deal Analysis & Advice

6 Tips for Buying Properties at Foreclosure Auctions

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auction-property

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.

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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:

  1. Delaware
  2. New Jersey
  3. Maryland
  4. Connecticut
  5. Illinois
  6. Ohio
  7. South Carolina
  8. New Mexico
  9. Florida
  10. 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

Conclusion

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?

Comment below!

Ian Colville is the Managing Partner of CCM Finance. Ian is a native of Minnesota (born in Rochester). He brings both a formal education (BA in Economics and MBA) as well as industry experience to CCM Finance. Ian is passionate about the many opportunities that real estate investments offer for both short-term and long-term financial gains. He is committed to helping local real estate investors turn those opportunities into profits. When not doing real estate deals Ian enjoys – well mostly he enjoys working on real estate deals. But if he does break away he is likely spending time with family or at the gym. Find out more about CCM-Finance and Ian here.

    The German
    Replied about 11 years ago
    I believe that the best real estate sales happen in the country side. It is a win-win situation and that is a market that can never slow down. In an area like rural Germany or France, the vistas are so beautiful that people can’t resist it. And the price is also pretty realistic. Nice article and all the 4 points make sense. Thanks 🙂
    Crystal Tost
    Replied about 9 years ago
    I find the advertising in other countries and in mediums that are not real estate related a waster of money and time. I think targeted advertising coupled with good pricing and proper presentation will get the house sold to a local buyer that is likely out there as we speak. Why focus on an audience that you are not even sure exists in mediums that are not targeted?
    David Grbich
    Replied over 8 years ago
    Setting a realistic list price at 10% below market may lead to a very lonely existence as a realtor – not many sellers in the California market have the equity to price 10% below market – but yes that should get the home sold. Great point overall – thanks.
    Joseph E. Investor from New City , New York
    Replied 10 months ago
    Tip 3: Never buy sight unseen. The above is absolutely right. I saw a property today that my associate bought on an online auction site. This was an “as is” sale, listed as occupied when it was not and he had to sign that he will not gain access before the closing. Luckily a neighbor advised him that there is water all over the house, the basement was knee deep in water. The damage is probably in the $10000s. Very high. He is now trying to renegotiate his deal. Anybody with experience in such a situation?
    Sharon Rosendahl Investor from Stanwood, Washington
    Replied 10 months ago
    Sight unseen can happen even with a standard listing. I went and looked at a duplex. I was shown the first side, repairs were needed but we had a pretty good handle on the cost. We asked to see the second side, the realtor said we should try but the tenant had never called back, there were no keys for that side etc. The tenant let us in, she was running a farm both inside and out (obviously we could see the outside part). We opted not to buy because it is possible we would have had to demo the whole building. Moral to this, a previous viewer actually offered and negotiated with the owner after seeing the first side. They were $5k apart and the seller wouldn’t budge and the buyer opted to not go higher. They had perceived that the repairs would be similar on both sides and had offered accordingly. The realtor apologized and I don’t blame him since he really didn’t seem to know. Shockingly, I saw that the place had sold for close to asking price through a different listing realtor. I have to wonder if any of these people actually saw the farm side. Be careful out there.
    Clint Debisette
    Replied 10 months ago
    Thank you for writing the Blog Ian, it was very informative.
    Todd Vernon Chunn Investor from Detroit, Michigan
    Replied 10 months ago
    I have been attending the weekly foreclosure Auctions in Wayne County (Detroit, Michigan) for approximately 5 years now. I specialize in Detroit fix n flips and Detroit rentals. I have seen others (newbies) purchase get burned because they did not do their homework. They ended up buying properties that they did not driveby first and the property looked decent on google but 2 weeks prior to the auction the property burnt down. They paid $20,000 for a teardown. I seen people buy second mortgages for $10,000 or less that had $50,000+ first mortgages attached. and I seen someone buy a property that had a $9000 water bill attached to the property. At the Wayne County (Detroit) Auction, you have 1 hour between the opening bid reading to due your due diligence and to go get a certified check for the opening bid along with any overage money that you are willing to bid up to. The bidding starts 1 hour after the reading and anyone that bids will have to show your money and prove you have the funds on you and if you are the winning bidder, you have to pay right then.
    Antonio Treto Investor from Wichita, Kansas
    Replied 10 months ago
    where do you go or what do you do to find out about liens and mortgage information?
    Elise Hazzard Property Manager from Saint Petersburg, FL
    Replied 10 months ago
    Great post Todd, I am new to auction process and have been trying to perfect the due diligence process. Do you involve a title agency (ever/often) to screen for any final issues?
    Rachel May Bailey Specialist from Kansas City, MO
    Replied 10 months ago
    In Missouri – Our team is hosting free workshops each month to help investors understand the process of buying foreclosures (and online REO auctions). If interested in buying for St. Louis, Springfield or Kansas City, check with me and I’ll let you know when our free classes are for your area! Missouri is non-judicial and the whole foreclosure process takes just over 60 days PLUS the redemption process rarely favors the non-paying homeowner….one of the least scary states to buy foreclosures in. 🙂 This means the buying process is faster and cheaper for owners of Missouri properties. Our neighboring states, such as Kansas and Illinois are judicial states which make the foreclosure purchases pretty ugly. Example – in Kansas the right of redemption rules over there can mean the investor puts down the money to purchase the foreclosure but doesn’t get access to the property for up to 12 months….and in many cases, the property is redeemed and the original investor looses the property (they get their $ back but they don’t get the property). Another example – in Illinois, the cost to foreclose on a note is double the cost to foreclose in Missouri…..making the whole buying process more expensive for everyone. It’s very important to learn about the legal history of this process in the state you are hoping to invest in!