Buying a House at a Foreclosure Auction

You’ve heard the stories and seen the ads. Perhaps you even know somebody who bought a home for pennies on the dollar at a foreclosure auction.  You’re tempted by the opportunity to get more house for less money, but you’re not sure where to begin and you have a fear of the unknown.  One of Gordon Gekko’s famous lines from the movie Wall Street rings true when it comes to buying a house at an auction, “the most valuable commodity I know of is information.”  Well, this article will give you a great start on getting the information you need to get started and help you decide if this is in fact a good home buying strategy for you.

First, let me be clear: buying a house at an auction IS NOT for everyone. You must either have the cash or be willing to take on a risky, high-interest “hard money” loan to buy the property. You must be cautious and you must know what you’re doing.  And even then, it’s risky. But with that risk comes potential reward…you can purchase a home for as much as 50 percent off list price.

Now a few years past the worst of the housing crash, foreclosures are still plentiful in the U.S. real estate market (especially in certain markets such as Florida and Las Vegas).  However, if you want your opportunity at a foreclosure deal at an auction, you’d better be prepared to spend not only money, but a lot of time preparing.

The Auction Environment

The first step in preparing to buy a house at a trustee auction is to go down to the auction and get a feel for the atmosphere.  Each county’s auctions are run a little bit differently, and you’ll want to know the ins and outs of the auction in your particular area long before bidding.

Foreclosure Tracking

Once you understand the auction process, you’ll want to start tracking foreclosures.  Locating properties being auctioned off is quite easy. There are many websites that compile foreclosures, and many Real Estate Agents and Auctioneers maintain lists of properties being auctioned off at foreclosure.  By law, all foreclosures must be advertised in the local newspapers of general circulation. Those ads contain the detailed legal description of the property, the terms and conditions of the sale and the date, time and place of the auction. The ads also indicate that in order to bid at the auction you will have to bring certified funds in a certain dollar amount.  That dollar amount often represents approximately 10 percent of the outstanding balanced owed to the lender. What the ad will not tell you is anything about the property features such as the square footage of the lot and the home, the number of bedrooms or baths or the property condition.  So now that you have a few foreclosures that pique your interest, the most arduous part of your research begins…

Due Diligence 

Liens and Lien Positions

Follow the published starting bid on your list, which may fluctuate, and look at the position of the lien that is initiating the foreclosure.  First of all, NEVER, EVER buy a lien that isn’t in first position, unless you’re a seasoned auction veteran.  If you buy a second position lien at auction, your purchase will still be subordinate to the first position lien, which could foreclose, wiping out the subordinate liens, so all the money you spent would be flushed down the toilet. Order a preliminary title report from a title company.  Most title companies will charge you for this, but, if you establish a long-term relationship with a certain one, they can provide it for free if they feel you’ll be a repeat customer and they have a good chance of getting your business.  Either way, this is a must because the auction purchases come with all existing liens and encumbrances and a preliminary title report will help to identify things like IRS liens or past-due taxes that you, as the new buyer, must pay.

Conduct a Drive-By

Once you have addresses for some of the auction properties in which you’re interested, visit the properties. Unfortunately, you typically won’t be able to get inside a foreclosed home, but you can view the house’s exterior condition.  Pay specific attention to the homes structural integrity.  Make sure it has a sound foundation.  Any cracks in a home’s foundation should turn you away immediately.  If you have access to the Multiple Listing Services through a Broker or Real Estate Agent, you may be able to view pictures from an old listing when the house was for sale. Keep in mind those pictures might be vastly different from the current condition of the houses interior. You may choose to peek in through the windows or slip in for a quick peak if it’s vacant, but always proceed with absolute caution. Because the home still belongs to the borrower, anyone attempting to visit or inspect the property in foreclosure does so at his own risk. Entering another’s property without permission is essentially trespassing and punishable under the criminal laws.

Financials

If you’re satisfied with the homes condition and considering placing a bid at the auction, you now have to determine how much you’re willing to spend on the house.  To determine your max bid, you must first know the After Repair Value (ARV) of the home.  You have the option to hire a real estate agent to provide you with a Broker Price Opinion (BPO), but this can be done on your own by conducting some research and finding Comparable (Comps) homes in the area.  Next, you must calculate the cost of estimated repairs needed on the home.  A friendly contractor or some thorough research can help you determine this.  Always add an extra 10% to your estimated repair costs to act as a buffer for the unexpected.  So now that you have your ARV and repair costs, use the following formula to determine your maximum bid:

Maximum Allowable Offer (MAO)= ARV x .7 – Repairs

Write down and stick to your MAO, not a penny more.  It’s easy to get carried away with the emotion of bidding wars, but you must being willing to let a property go as soon as it goes over.

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