“The minimum bid for a house is only $500—I can get an investment property at a steal!” Joe exclaimed to me over the phone. He called me from his home to tell me all about his plan to begin investing in real estate locally by buying property from Buffalo, New York’s tax foreclosure auction. While there are some benefits to buying auction properties, the other side of the line went quiet when I began to tell him about the potential pitfalls.

Buying Property From Buffalo, NY’s Tax Foreclosure Auction

Erie County Real Property Tax Service division acquires various properties from homeowners who are delinquent on their taxes. In fact, many of these homeowners haven’t paid their property taxes in five or more years! As a result, the county forecloses on the property and provides the homeowner with a Notice of Sale. The homeowner then has up to the date of the auction to make good on their debt. Otherwise, the house is up for sale to the highest bidder—and that could be you.

Buying an auctioned house from Erie County can be a good deal. After all, as Joe pointed out, the minimum bid is just $500 for some of the properties. The potential to get an investment house cheaply is the biggest draw for people like Joe. In addition, you can expect a quicker close to the deal if you win the bid. Auctions allow you to avoid the tiresome process of putting in an offer to a homeowner only to get a counteroffer, which entangles you in endless negotiations. Instead, you bid and buy on-site.

At least that’s how it works in theory. Stories abound about how you can get outnumbered by high-rollers and lose your bids time after time, only to walk away empty-handed. Others say that shill bidding, or bidding on a property with no intent to buy it, is fairly common and unfairly drives up the price. While I haven’t attended the foreclosure auction in Buffalo yet, shill bidding is definitely a possibility there. That said, the real risks for buying one of their tax-foreclosed properties lie in the Terms of Sale. Let’s take a look at those terms:

• Deadlines. If you win the bid, you’ll be expected to pay cash or a certified check for the total purchase price within about 30 days. You will not get any phone calls or reminders in the mail, and if you fail to make the payment in time, you will be considered in default. As a result, you’ll be charged a 9% annual interest rate on the amount owed from the time of the sale to the transfer of the deed. In addition, you may find yourself on the hook for other costs and fees, such as those for an attorney.

• Taxes. The Referee will use the auction proceeds to pay back some of the outstanding balances associated with the property in order of priority, starting with costs of the sale, any monies awarded to the county through judgment, and, finally, property taxes—if there’s any money left. That means you could end up with a property that you have to pay significant back taxes on. There may also be other undisclosed liens on the property, and you will be responsible.

• Liability. The house may be in a state of deterioration from sitting empty for quite a while. From the minute you win the bid, you are liable for any damage to the property, so any harm resulting from natural disasters, fire, or vandalism is on you. You’ll need to cover the costs of securing and insuring the property, even before you have a deed in hand. Beware, however, that the property may not actually be insurable for specific hazards, and the county makes no warranties.

• Double bind. The Terms of Sale specify that you bear sole responsibility for performing due diligence on the state of the property. However, you have no legal authority to enter until after the transaction closes, so you cannot perform a home inspection to make sure you’re not buying a money pit.

This is just a brief list of the potential problems of buying from Buffalo, New York’s tax foreclosure auction. But it pays to read the fine print and know what you’re getting into if you choose to buy foreclosed property from any auction.

A Better Way to Buy Investment Property

Investing in real estate carries inherent risk, so why make it even riskier by exposing yourself to auction contracts you don’t understand? It makes more sense to buy from a distressed homeowner who needs to get out of a financial pinch by selling their home for cash, quickly. That way, you can actually see what you are buying and be more confident that the house has good potential for returns. I tell new investors that the best way I’ve found to get leads to these deals is by becoming a HomeVestors® franchisee. HomeVestors®’ widely known “We Buy Ugly Houses®” marketing campaign has already helped independently owned and operated franchisees buy over 140,000 houses nationwide since 1996. Skip the courthouse steps and call HomeVestors® today.

Each franchise office is independently owned and operated.