Buying a Foreclosure at Auction: What to Look For
If you are a first-time homebuyer or novice investor, buying a foreclosure at your local county auction or online is generally a bad idea. Auctions are popular among real estate investors. And those with experience know what they’re doing.
Several years ago, Jon and I purchased a foreclosure at an auction in Philly. We buy houses for cash, and the auction made sense for our business.
What are the Types of Property Auctions?
There are three basic types of property auctions:
1. Absolute Auctions
In an absolute auction, a property is sold to the highest bidder, regardless of the price they offer. Absolute auctions do not have a reserve price or a required bid amount for the item to be sold.
2. Reserve Auctions
In a reserve auction, the final bid can get rejected by the seller if the reserve price isn’t met. When buying a foreclosure at auction, a reserve is commonly used. This is because lenders try to recoup most, if not all, of their losses from the sale of the foreclosed home.
3. Minimum Bid Auction
In this type of auction, the minimum bid is disclosed to the bidders. To participate in the auction, you must start bidding at the set price. This type caught my attention because “Sellers often prefer this type of auction because it reduces the risk of losing money.”
What Types of Properties are Sold at Auction?
Jon advises that “Any property type or asset can be sold at auction, but the most common properties sold at auction are foreclosures. Of course, this varies depending on your market and auction.”
Typically, the types of real estate properties sold at auctions include single-family homes, commercial properties, multi-family homes, and plots of land.
Pros & Cons of Buying a Property at Auction
Just like any other real estate investment, you need to know what you’re getting into before buying a foreclosure property at auction.
Pros of Buying a Foreclosure Property at Auction
- Great price: The number one reason investors buy properties at auction is the potential for significant savings. You can easily walk away from an auction with a property discounted by more than 25% of fair market value.
- Less competition: Auctions are only generally frequented by savvy investors. So, there’s less competition with the Multiple Listing Service (MLS), where a house may get multiple views and offers, driving up the price.
- Return on investment: If you can buy a property below market value, you have the potential for a significant return on investment (by reselling or flipping it).
- Quick sale: One of the main benefits of buying at an auction is the speed at which the process can be completed.
Cons of Buying a Foreclosure Property at Auction
- As-is condition: Since you are buying the property as-is at auction, you have limited information about its condition. It’s also rare that you’ll be able to hire an inspector to review the property or even view the house yourself.
- High repair costs: For the most part, you won’t know what you’ve purchased until you get the keys and open the doors. Plus, many disgruntled homeowners facing foreclosure intentionally damage properties to spite lenders.
- Liens: As-is properties may also have liens on them. Therefore, it’s in your best interest to have a title search done.
- Occupied home: It might not happen that often, but you run the risk of buying a home with occupants in it. You could find that your new investment includes runaways, professional squatters, and drug addicts, to name a few.
- Delayed possession: Occasionally, banks may delay the sale. So, have some patience and understand that this is sometimes part of the process.
- Upfront cash: In almost all auctions, you need to be prepared to pay with cash or certified funds. This fact alone separates the fly-by-night investor from the professionals.
Summary
Buying a house at auction as a new investor or first-time home buyer isn’t usually the best option. To minimize risks, it’s usually best to build your investor network or develop real estate experience (via house hacking or other methods) before buying a foreclosure property at auction.
