Foreclosure Auctions Explained: Your Comprehensive Guide to The Ins and Outs

One of the best things I did at the start of my real estate investing career was to find a regional market where there was a lot of ongoing foreclosure activity. By showing up to foreclosure auctions and putting in competitive bids, I was able to learn a ton about the process and nab a few fixer-upper properties at significantly less than the market price. A few months later, the homes were ready to turn around to a new owner.

Of course, understanding the process and why it’s worth doing is the only way you can make investing in foreclosure properties a profitable proposition. For investors who are just getting started, participating in foreclosure auctions can seem a bit daunting. After all, if you want to leave an auction with a deed to a house in hand, you’ll at the very minimum need to be confident in your valuation of the property, your bidding skills, and your access to financing.

But, I’m here to tell you that it’s easier to get started with foreclosure auctions than it might appear. Let’s take a look at your incentives for buying properties via auction to start, then we can get into the details about how to be an effective bidder and profitable buyer.

Why Buy At Foreclosure Auctions?

The biggest reason why it’s worth buying homes at foreclosure auctions is that it’s possible to find bargains that don’t exist elsewhere in the market. Because it’s hard to secure traditional mortgage-based financing for a foreclosure purchase, prices start significantly lower, and you won’t face any competition from prospective owner-occupiers. If you’re planning to buy a foreclosed property and make improvements to it with the intention of selling it soon after, your profit margin can potentially be higher than with non-foreclosed investments.

It’s also worth noting that foreclosure auctions don’t require haggling with property owners that are looking to sell their underwater home quickly. So, if you’re still working on your negotiating skills, you don’t need to worry about spending too much time going back and forth with a seller. And, dealing with the state or a bank as the counterparty means that there won’t ever be hiccups with inexperienced sellers who may not have a handle on how to close real estate deals.

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How Foreclosure Auctions Work

Foreclosures happen when borrowers fall too far behind on their mortgage payments and when the state seizes property to recoup its losses from unpaid taxes. In all cases, the point of the foreclosure auction is to sell the home and therefore repay the lender or the government the money that they’re owed, which is typically lower than the actual value of the unit.

As a buyer at an auction, you’re looking for properties where there is a large difference between the potential value of the home and the starting price for the auction. I say “potential” value because you’ll usually need to invest in some improvements to any foreclosed homes that you buy if you want to sell it later at higher than its market price at the time of the sale.

Auctions are typically held by local government bureaus, such as court clerk offices and sheriff’s offices. Once a home enters the foreclosure pipeline, it’ll be listed on their websites. Then, eligible buyers can view the legal documents related to the property, do their diligence, and enter bids against each other. When the time limit elapses, the winner of the auction can put the home under contract, provided that they have the financing in place to do so.

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Starting The Process

The first thing you should do to start looking for foreclosed homes is to pick a regional market where there is significant foreclosure activity and also significant home buying activity that’s creating upward pressure on prices. Then, start cruising the foreclosure listings on government websites in the market.

If you find a listing that looks favorable, make sure that you have enough cash on hand or that you have secured enough financing before attending an auction or placing a bid online. The payment terms for foreclosures tend to be highly restricted and inflexible, so any trouble with your funding will sink the deal promptly. And be sure to have a hard figure for the home’s actual value in comparison to the starting point of the auction.

Once you put in a bid, monitor the auction for other bidders. If the prevailing price rises above the value you calculated, think hard about whether it’s worth placing another bid to seal the deal. Your profit margin depends on it.

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Understanding The Risks

There are a handful of risks to buying foreclosed properties. Most importantly, you may not be able to send an inspector to the house before you buy it. Therefore, your chances of finding undisclosed structural problems after the purchase are quite high.

You may also need to deal with issues like deed restrictions and tax liens that are attached to the home. Whenever you buy a property, its problems become yours.

As if that weren’t enough, the rights to foreclosed houses can sometimes take a lot of time to work their way through the legal system before ending up under your full control after the auction closes. You could be waiting for months without holding your funds or the deed to the property. In the meantime, you’re still on the hook for whatever is going on with the real estate.

In sum, understand that foreclosed units are rarely as straightforward as they seem.

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Planning for Profit

The way to deal with the risks of buying foreclosed properties is by doing your due diligence and having a strong estimation of the property’s value before attending the auction. If you aren’t careful about protecting yourself as much as you can before closing the deal, your chances of getting an expensive lemon are high. On the other hand, once you get the hang of buying from auctions, you can scale up your operations and develop a deal flow that works for your business.

Even if you do your best, there could still be issues that come back to bite you. Thus, it really helps to have an experienced mentor to advise you during the process.

If you’re not familiar with how to accomplish these prerequisites, becoming an independently owned and operated HomeVestors® franchisee could help. Franchisees can get extensive training on how to navigate the foreclosure auction process, and they also get access to sophisticated valuation software, not to mention exclusive and flexible financing options. If you’re considering starting a real estate investing business, request information about becoming a franchisee today.

Each franchise office is independently owned and operated.