If you’re looking for a good deal on your next real estate investment, and you’re ready to try something new, a foreclosure auction might be a viable option for you. Why limit yourself to traditional listings? Real estate investors are always looking to get the most bang for their buck with a profitable deal. Buying a foreclosed home at auction is becoming one of the best ways to do that. But first, you need to make sure it is the right strategy for you.
What Is a Foreclosure Auction?
Real estate auctions are an alternative for buyers searching for a quick, cash up-front purchase of an investment property which usually comes at a discount. While real estate auctions can bid off any type of real estate property or asset, the most common type of real estate you’ll find at an auction is foreclosed properties.
Lenders, which are typically banks, want to sell foreclosures as fast they can. The lender’s goal here is to recover the balance of a loan from a borrower who’s defaulted on their mortgage payments. A foreclosure auction is a good way to do that.
Most buyers at foreclosure auctions are experienced real estate investors who know what they’re doing. Buying a house at auction opens up investors to a whole new market, with a different pool of competition, and different pricing negotiations. To determine whether or not buying a foreclosure at auctions is the right thing for you, let’s cover some important things to consider.
Related: What’s Foreclosure & How to Invest in One? – Infographic
What You Need to Know About a Foreclosure Auction
The Foreclosure Market in the US
Before getting into the ins and outs of a foreclosure auction, understand where the foreclosure market stands right now. For a healthy market, everyone in real estate wants to hear about a drop in foreclosures. In the US housing market, foreclosure filings in 2018 were reported on 624,753 properties. If this sounds bad, it isn’t. This is an 8 percent decrease from the prior year. This is actually lower than any other year since 2005. While foreclosure auctions typically happen very quickly, the regular foreclosure process is quite long. The properties foreclosed on in Q4 2018 spent an average of 811 days in the foreclosure process. Real estate investors looking to invest in foreclosed properties should keep track of the properties in their local market. This will allow them to know when to hit the foreclosure market.
There Are Two Types: Live Auctions and Online Auctions
So the first thing you want to do is figure out what type of foreclosure auction you’re going to participate in. Live foreclosure auctions, just like an auction for anything else, take place at physical locations (such as a hotel conference room or a county courthouse). Give due diligence here as first-timers could very easily be overwhelmed by the atmosphere of a foreclosure auction. Learn the ins and outs of how things work in your county’s auctions. A foreclosure auction is open for anyone to attend, but if you want to participate and bid on a property, you need to register.
Online auctions have been increasing in popularity among real estate investors. This is simply because they require less hassle. With an online foreclosure auction, buyers can bid from wherever they are, and the auction itself can take place over the period of days or weeks. Real estate investors also have a wider variety of discounted properties to bid on with online auctions. You can find bank owned properties, short sales, and even commercial real estate.
Related: How Do Online Real Estate Auctions Work?
It Might Be a Discounted Sale, But Be Prepared to Pay in Cash
Lenders are not looking to give out another loan on this property, so buying a foreclosure at auctions means paying full sales price, in cash. So when asking yourself if buying a home at a foreclosure auction is the right thing for you, you need to determine whether or not it is financially feasible for you to even participate.
If you’re really motivated to buy investment property at a foreclosure auction but don’t have the cash, there is another way. Buyers can take out a hard money loan, but these are typically very risky and have high interest rates. Most foreclosure auctions accept cash, a bank money order or cashier’s checks for payment.
When registering to bid in a foreclosure auction, bidders must provide official documents proving their financial competency. Some county foreclosure auctions require an advance deposit which can range from 5-10 percent of the estimated final bid on the foreclosure. In almost every state, buyers have to pay the full price the same day the auction of the property is complete.
Related: How to Buy a House at Auction Without Cash: An Investor’s Guide
The Property’s Condition Isn’t Known
All foreclosure auction listings are sold as-is. So you’re investing in a home that might have been under foreclosure for a long time or has missed countless maintenance checks. Most real estate investors know this when buying a foreclosed home. But this is the risk that comes with getting a good investment deal; you just need to determine whether or not it’s worth that risk.
Often times, foreclosure auction properties don’t allow for a home inspection. Buyers also don’t usually have any legal way to view the property’s interior condition in person. Sometimes, if a property is selling at a price too good to be true, it’s for a reason. Can you afford the risk of investing in a property that might require extra repair costs? A tip, in this case, is to drive by the property being auctioned. Even if you can’t go inside, you’ll still get a better idea of the property’s condition. The exterior typically reflects the interior.
If you don’t have a specific investment property in mind, track foreclosures in your area. You can check out the local newspaper, find foreclosure sales data from your county online or at the courthouse. You can also work with the county-appointed trustee, a local real estate agent or broker to identify these investment properties. If you want more details, use a foreclosure tracking tool such as RealtyTrac or Auction.com.
Note: You can visit the Mashvisor Property Marketplace to search for and analyze foreclosed properties in your real estate market.
Most Important Point: Due Diligence
If you are ready to invest in a home purchased at a foreclosure auction, make sure to do your research. You need to read and make sure to understand all documents and transactions prior to entering the auction. A couple of the things to know about the property you’re interested in: its estimated resale value, the amount the borrower owes on the mortgage, and learn if there are any liens against the property.
It’s very important to know if there are any liens against this property. If you end up winning the final bid, you’ll have to pay off all the liens. Start off by keeping track of the starting bid on the investment property. The starting price is usually the balance owed on the mortgage, or sometimes an amount lower than that. But it’s never higher as the lender in a foreclosure auction can’t profit from this sale. Buyers must also find out the position of the lien which initiated the foreclosure. It’s recommended that first-time bidders stay away from properties with a lien in second position.
To properly assess future real estate investments in foreclosed properties, Mashvisor’s tools can help you in any investment property analysis. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.