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. Real estate auctions are growing in popularity, but this is where experienced investors come to play. When you don’t know what you are doing, you can easily find yourself on the losing end of a deal.
Keep reading to learn more about buying a foreclosure at auction, what the pros and cons are, and what other options are available to new investors.
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. 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 be 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. For you to participate in the auction, you must start bidding at the set price. Sellers often prefer this type of auction because it reduces the risk of losing money.
What Types of Properties are Sold at Auction?
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, real estate notes, 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. Keep reading to learn the pros and cons of buying a forclosure at auction.
Pros of Buying a Foreclosure Property at Auction
The pros of buying a foreclosure at auction include:
- Great price: The number one reason investors buy properties at an auction is because of the potential 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 compared with the Multiple Listing Service (or MLS), where a house may get multiple views and offers, driving up the price.
- Return on investment: If you can buy a property way below market value, you have the potential for a huge return on investment if flipping the property after renovating it, renting it, or simply selling it on.
- Quick sale: One of the main benefits of buying at an auction is the speed at which the process can be completed. Buying through a real estate agent can take months, whereas an auction purchase can be completed in days.
Cons of Buying a Foreclosure Property at Auction
Comparitively, the cons of buying a forclosure at auction include:
- As-is condition: Because 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. Therefore, buying without knowing what to look for and what questions to ask can be a huge risk.
- High repair costs: For the most part, you won’t know what you’ve purchased until you get the keys and open the doors. Some properties might look great on the outside but are damaged inside. Plus, many disgruntled homeowners facing foreclosure intentionally damage properties to spite lenders.
- Liens: When you purchase as-is, you get the house and any liens placed on it. Therefore, it’s in your best interest to have a title search done to ensure the house is free and clear.
- 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 process of the sale. Banks are known to take their time when considering an offer or completing the necessary paperwork. So, have some patience and understand that this is sometimes part of the process.
- Upfront cash: In almost all auctions, both online and in-person, you need to be prepared to pay with cash or certified funds. This fact alone separates the fly-by-night investor from the professionals.
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.
If you’re thinking about buying a property or investing in real estate for commercial reasons, Brotherly Love Real Estate are your local property experts in Philadelphia and San Diego. Contact us online today or give our team a call at (215) 769-9875 to discuss which properties you’re interested in. We can support you to buy a property with less risk and more information than at a property auction.