Buying homes from a foreclosure auction has been a popular method for acquiring discounted real estate among investors for decades. But this real estate investing strategy isn't always easy. There is a lot to know about the public auction process and what it takes to be the successful bidder.
Learn what a foreclosure auction is, how to buy homes at a foreclosure auction, and the pros and cons of investing in real estate this way.
What is a foreclosure auction?
A foreclosure auction is a public auction that sells property once the foreclosure process has been completed. When a homeowner stops paying their mortgage, the lender has the right to pursue foreclosure action as a way to recoup the balance still owed to them.
Depending on the state, the property will be set for sale by the sheriff's office or by a trustee who will designate a specific date, time, and location for the sale. The day of the auction, third-party bidders are able to bid on the property until the minimum bid or reserve price is met or the end of the bidding period, where the property is awarded to the highest bidder.
Attending a foreclosure auction
Foreclosure auctions are conducted by local jurisdiction and can be held online or live at the county sheriff's office or county courthouse.
Most counties will publicize the homes set for foreclosure sale online. However, if your county does not have this information online, call the county's office to get this information.
Each state and jurisdiction has a different process for foreclosure and foreclosure auctions. If you plan to attend a foreclosure auction, you should familiarize yourself with your local jurisdiction's process including:
- The type of auction.
- How the auction is held (online or in person).
- Whether a deposit or down payment is required if you are the successful bidder.
- What type of funds are accepted if you are the winning bidder and how much time is provided before the amount has to be paid in full.
- Whether there is a redemption period.
Foreclosure sales are cash-only sales, meaning the county expects payment in full from the winning bidder in the form of a cashier's check or wire transfer within a set period of time after the sale has been completed. This can take as little as 24 to 48 hours up to several weeks, depending on the county. For this reason, investors who plan to bid at the auction should have cash available or alternative financing like a hard money loan lined up.
Properties sold at a foreclosure auction may have other liens or encumbrances, like an IRS lien, unpaid real estate taxes, or code violations. It's the investor's job to research the property before the sale date and conduct their own due diligence on what the property is worth, as well as whether there are any liens or title issues, and establish their maximum bid.
Buying a property at a foreclosure auction
It's important to understand that just because you may win a bid at auction doesn't mean you instantly own the property. You as the winning bidder will need to pay the total purchase price, or total bid amount, in addition to the county's fees for conducting the sale.
The county will then issue a certificate of title (COT), which is publicly recorded and shows a transfer of ownership from the lender to you. This can take several days up to several weeks, depending on how behind the courts are. In the meantime, it's a good idea to insure the property to protect your interest in the home.
It's also important to note that the sale can still fall through even after the sale is completed. Homeowners who want to avoid foreclosure can file bankruptcy just before the sale, which can make the foreclosure sale invalid. Additionally, if the state has a redemption period, the homeowner can redeem the property after the sale has been completed by paying the total judgement amount due to the lender.
Pros and cons of buying at a foreclosure auction
Buying homes at a foreclosure auction can mean you are picking up a property for a great price, on average, 15% to 30% off of the property's value, but this method of purchasing is only available to those who have the financial means to buy a home for cash.
Plan to budget for repairs or renovations. Since you can't access the property before the sale, you have no way of determining the interior condition. Some properties will be in great shape while others will need a full rehab. It's better to assume and budget for the worst than be unpleasantly surprised.
Additionally, investors will spend a lot of time researching an asset that is set for sale only to have it potentially removed from the sale list the day of because of bankruptcy or another issue, such as improper notifications to interested parties, or they may be able to bid but lose to a higher bidder.