After the housing crash in 2008, homebuilding was a dying business—one that my partners and I needed to replace with a new source of revenue. From our experience, flipping foreclosures seemed like a relatively easy way to make money. Considering how quickly home values have dropped, we thought we’d be able to score some great deals right away.
We thought wrong.
After weeks of searching the MLS for foreclosed properties and writing hundreds Number of offers, we were yet to buy a single foreclosure. We were beginning to feel that foreclosure was a waste of time.
Finally, thank you for the opportunity to discover a foreclosure of a partner. was not Listed on MLS, we felt what we were looking for in worst The place to go for deals on foreclosure. We were competing with countless buyers when the real deals were closing much earlier in the auction process.
It is only those properties that fail to sell at auction for one reason or another that turn up on the REO foreclosure list. If a bidder buys a foreclosure on the steps of the courthouse, that property will never hit the MLS—at least not until the buyer is ready to resell it.
Ultimately, we bought the foreclosure the day my partner was auctioned. After that, we bought several more. We sold these properties for a significant profit and built a new business based on these successes.
The process seems somewhat simple now, but looking back, it certainly didn’t feel that way at the time; It was confusing, and I was constantly worried that we were just one costly mistake away from failure.
Connected: How To Successfully Market Homes In Pre-Foreclosure
Risks of Buying Foreclosures at Auction
If you are a new investor or new to foreclosures, it is important to remember that buying a property at auction Is loaded dice. Things can go wrong, and when they do, they can cost you dearly. Big,
But that’s not to say that you shouldn’t pursue foreclosure flips as an investment strategy. What I am saying is that you must first know what you are doing.
The best way to minimize risk with foreclosure buying is to hold off on buying until you really understand the process. In our upcoming book, bid to buyWe detail the foreclosure process And Pitfalls to avoid when bidding on distressed assets.
Below, I highlight the five biggest risks associated with buying foreclosures at auction and offer ways to reduce these risks based on over a decade of experience and over 700 successful foreclosure flips.
Risk #1: Inventory accuracy
Auction notices are usually printed on paper and posted at courthouses. While this low-tech approach to closing foreclosures is slowly improving, most bidders still get information on properties from foreclosure listing services. In most cases, businesses offering these services collect the printed data and resell the information after digitizing it.
The problem with this is that the process of digitizing asset information is prone to human error. Prices may not be accurate. Addresses may be incorrect. I know people who bought the wrong property because of listing inaccuracies, so it’s Important To scan property information for errors Earlier Bidding at auction.
Connected: How to Buy a Foreclosure: Guide to Finding and Landing a Foreclosure Deal
Risk #2: Asset Position
It is impossible to know the exact condition of a property when buying a home at auction. Unlike an REO sale, you won’t have a chance to walk by the home or inspect it. Plus, it’s not uncommon for owners to trash a space after a default, so there’s always a chance that properties purchased at auction will need some serious work.
Since there’s no way of knowing the exact condition of the properties you’re bidding on, you mitigate this risk by pricing them as they are. May required in your calculations. By doing this, you don’t have to worry about overpaying for tens of thousands of dollars worth of work before a space is ready for resale.
Risk #3: Business
Properties sold at auction may still be in possession. If you buy a property that is occupied, you will need to evict the occupants before you can move in. Depending on state law and other factors, it may In fact slow things down Previous owners may also file lawsuits against the lenders. houses can be tied when this happens Year,
While there are potential advantages to buying a foreclosure with occupants, a less risky approach is to buy vacant properties. To determine occupancy with relative accuracy, you need to do drive-by inspections.
When on the property, look for obvious signs of occupation, such as cars in the driveway. For extra reassurance, try knocking on doors or talking to neighbors. Another trick is to turn on an outside faucet to help determine if the water has been shut off.
Despite there being no signs of occupation, there is always a possibility that someone is living in the property. Nevertheless, with our drive-by process (which is detailed further bid to buy), we are able to determine occupancy correctly about 90% of the time.
Risk #4: Clear Title
Remember earlier in the article when I said that you should hold off on buying property at auction until you understand the foreclosure process? Here’s why: It’s not always a simple process involving missing payments on a mortgage. in other words, there can do Having more than one lien on one house.
While some liens end in foreclosure, others will need to be paid off by the new owner. If you buy a property at auction without researching its title and financial history, you could find yourself on the hook for unpaid property taxes, junior liens and other unexpected fees. Always Thoroughly review titles on properties before bidding to avoid any bad (i.e., expensive) line surprises.
Risk #5: Valuation
Bidding too high for a foreclosure due to an incorrect appraisal is one of the most common mistakes new investors make at auction. But since you never know the exact condition of a property offered at auction, it’s hard to accurately estimate the value with the same methods used for listings in the MLS.
Fortunately, there are ways to avoid overpaying for foreclosures, even without knowing your foreclosure status.
In an upcoming article, I will detail the tools and strategies I use to make educated guesses on the value of foreclosures sold at auction. while it is not possible to know Absolutely No matter how many bids are placed on a given property, it is certainly possible to get close enough to secure profitability on resale.
Bidding to Buy: A Step-by-Step Guide to Investing in Real Estate Foreclosures by David Osborne and Aaron Amuchastegui is available now in BiggerPockets Bookstores.
Do you have questions about the risks associated with buying foreclosures at auction?
Post them for me in the comments section below.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
