Buying property at a foreclosure auction seems like a great strategy for finding a deal – but it’s not always a cut-and-dry process.
For those who are thinking of looking at foreclosure properties or who have tried and have not been successful, the information in this article will help you decide whether foreclosure auctions are a viable route to home ownership and if If they are, how can you navigate the process successfully? Here’s how to buy a home at auction.
How do houses end up at auction?
When a homeowner fails to make payments on his mortgage, the loan falls into default and eventually the home falls into foreclosure. Before the foreclosure sale occurs, the homeowner can either (a) try to negotiate with the bank (for example, by moving the missed payments to the end of the loan term) to pay off the missed payments over time; drawing up a payment plan, etc.); (b) refinance the loan with another lender, who will pay the foreclosure lender; or (c) pay off the balance of the Loan.
Failing either of these options, the bank will put the home up for sale in a foreclosure auction with the auction house. In this scenario the bank is the seller, and their main goal is to recover the loan amount – the balance on the loan – as well as other expenses, such as those associated with the foreclosure process.
How do foreclosure auctions work?
Homes up for sale at foreclosure auctions are typically advertised both in the local newspaper and online. Depending on the region, the announcement may be 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 usually take place at local courthouses, and anyone can attend for free. Online auctions are obviously quite different. They are done through a website, so participants need to register. There may also be a fee on top of the sale price.
First, an important myth buster
Buying a property at a real estate auction, especially in today’s market, will not necessarily mean that you will be able to “steal” the property at a huge discount. Currently, the number of foreclosures in the United States is at its lowest point since the Great Depression. Lenders have less number of foreclosed properties, and they are not going to give anything.
Foreclosure auctions also do not mean that the homes are priced below market value. One, the homeowner/borrower may have borrowed the maximum allowed by paying too little on the initial mortgage balance. Two, by the time a property goes to auction, significant additional fees can be 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 that you need to do your homework, have reasonable expectations and do your due diligence.
Where are the foreclosures?
In the current market, foreclosures are not necessarily easy to find; Nationwide, foreclosures are down 76% from a 2010 high of 2.9 million. But there they are. 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:
- Delaware
- new Jersey
- Maryland
- Connecticut
- Illinois
- ohio
- South Carolina
- new Mexico
- Florida
- New York
More on Buying Foreclosure at Auction from BiggerPockets
Risk-Free (And Mostly Free) Ways to Learn About Foreclosure
For investors new to buying real estate at foreclosure auctions, and especially for investors new to buying real estate, it is easy to become overwhelmed by the process. After all, there’s a lot to learn and a lot of risk involved.
With a little education and preparation, bidding on foreclosures becomes much less risky, and the potential rewards can certainly outweigh the inherent risks.
Everyone was a beginner at some point, but with time and experience, newcomers can catch up to seasoned investors. Know that this is an ongoing learning process that gets easier over time, and each experience is an opportunity to learn something new and improve as an investor.
As with any new endeavor, investors shouldn’t let fear or doubt paralyze them. The only way anyone can make progress is to take action, but that means slow, steady, deliberate steps toward the goal. Rushing toward that first foreclosure purchase is going to cause burnout, and investors can easily spend 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’s no harm in trying them, and it can help overcome those feelings of self-doubt and uncertainty.
1. Learn About the Foreclosure Process
It may come as a surprise, but there are countless examples when an investor sets their sights on a property that was 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 be wary of the convoluted path that homes often take to auction. Better yet, learn about the process of buying foreclosure at auction.
There are also many books that are great resources. bid to buy Outlines each step required to buy distressed properties on the courthouse steps. It is available for purchase at BiggerPockets Bookstore.
Plus, with each purchase, authors get access to the same resources they use throughout their process, including spreadsheets and checklists.
2. Actual value/value of the target house(s)
All investors like to fantasize sometimes (or even often) about buying a home at the lowest possible price and then selling it at the highest possible price. 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 price estimates for a property you’re interested in. After that, think about how much the property should be bid for to get a good profit on resale.
Oh, and don’t forget to take into account realtor commissions and repair costs.
3. Price/Value Other Properties
Valuing (or appraising) your home is obviously much easier than valuing someone else’s property. After all, homeowners know the condition, improvements, and repair needs associated with their home.
Also, when a home is for conventional sale, it is usually easier to tour, in addition to the ability to have the home inspected.
Unfortunately, this type of information will not be available for most foreclosure homes. If information is readily available, it is wise not to rely on it, as the situation may change Enough Between the final sale of a property and the foreclosure.
For practice, try appraising some recently sold properties. Do this before looking at sales figures. Then, go back and see how close your estimates were compared to the properties that actually sold.
This exercise will help you to be able to assess property values. This is an important skill for any real estate investor, and absolutely crucial when it comes to placing the winning bid on a foreclosure at auction.
4. Attend Foreclosure Auctions
Finally, why not participate in a foreclosure auction? It’s free (in person), it’s fun and there’s no purchase required.
Attending auctions without any intention of buying is a great way to understand how they are run. There is no pressure, so it is very easy to just take the experience. When the day for the first bid finally arrives, you’ll have a lot more confidence and can focus on getting a great deal instead of trying to figure out what’s going on.
Follow these four risk-free ways to start learning the ropes that anyone can do.
The time will come when learning will cease. 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 twins.
For now though, take one small step by attending a home auction. There’s nothing else like it, and it’s really fun.
Navigating the Foreclosure Auction Process
Below are general tips that are useful 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 foreclosure. There are two common formats: judicial and nonjudicial foreclosure. In judicial foreclosure states, the process is handled through the courts. In nonjudicial foreclosure states, the process is mostly handled outside of the courts, as the process is generally faster and less expensive. However, the lender may have the option of pursuing foreclosure through the courts and will do so in certain circumstances.
Another important factor that varies by state is the foreclosure redemption period. It is a specified period during which the owner can redeem the asset. If there is a redemption period, there is usually nothing the buyer can do until it expires. For example, the buyer cannot evict tenants or collect rent during this period.
Step 2: Find out about auctions.
Investors can search the Internet for foreclosure auction listings in their area. Better yet, try to buy a property before it goes to foreclosure auction. Once the auction is done, the competition will become 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 little trickier because buyers usually can’t do any kind of inspection before the auction. It is essential that the contract provides for an inspection before a deal takes place. Be sure the offer includes a “Subject” clause that will allow buyers to conduct an inspection.
Step 4: You’re buying “as is” — and that’s exactly what it is.
Foreclosed properties are likely to be in poor condition. Owners, if they still own the property, have long lost any motivation to keep up with repairs and maintenance, and it is not uncommon for them to become destructive. Know that it is likely to go in.
Step 5: Check for Claims, Liens and Occupants
A word of caution: Buying a foreclosure at auction comes with a high degree 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 former owners still occupying the property? Who will be responsible for evicting any occupants?
- Cash payments must be made within 24 hours, such as by cashier’s check. If problems are found with the property, the buyer still has to pay the money.
Step 6: Keep cash ready.
The market is very competitive, and the bidder paying all cash will win. This means that bidders will have to submit to the auction and close soon.
A buyer who uses financing must prove they can stand any chance of being the highest bidder.
Step 7: Understand the financing restrictions.
Investors often run into the following dilemma: the bank that owns the property will not pay for the repairs, but the bank from which the investor wants to get the loan will not lend until the repairs are done. In this situation, investors may want to consider a 203(k) loan or a private money loan from the U.S. Department of Housing and Urban Development.
Step 8: Wait for the certificate of title.
The buyer with the winning bid will receive certificate of sale as soon as they have paid, but certificate of title Will take a few days. This means that the house can be snatched during this period. For example, if the original owner pays off the loan, he will still have title to the property. Once the buyer is in possession of the certificate of title, the property is officially theirs, and they can begin work on it.
If you are considering foreclosure auctions as a source of potential investment properties, be sure you know how they work. As a strategy, view foreclosure auctions as a potential source of finding a great investment property, not as a place to find a killer deal. As an investor, you have to be prepared to accept the risks associated with foreclosure properties. Do your homework to reduce as many risks as possible.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
