You’ve heard the stories and seen the ads. Perhaps you even know somebody who bought a home for cheap at a foreclosure auction.
Now, you’re thinking about buying a home of your own.
You have CASH from savings or an inheritance.
And you’re tempted by foreclosure auctions (where banks sell foreclosed homes to quickly get rid of them). After all, you see the opportunity to get a lot more houses for a lot less money.
If this sounds like you, let me give you an honest introduction to buying houses at auction.
First, let me be clear: buying a house at an auction IS NOT right for everyone.
You must either have the cash or be willing to take on a risky, high-interest “hard money” loan to buy the property.
You must be careful.
You must know what you’re doing.
And even then, it’s risky.
But if you can pull off buying a house at auction, you can get into a home for as much as 50% off list price.
THE FORECLOSURE MARKET
Foreclosures still abound in the U.S. real estate market, although some areas (think Florida and Las Vegas) have way more than others.
ForeclosureRadar, a comprehensive auction-tracking tool for real estate professionals, states that 80% of homes that were auctioned in California in February of 2009 were sold at an average of 36.3% below listing price and 40% of the homes sold at auctions were sold for 50% or a greater discount. Yes, that is data from February of 2009, but your chances of getting a killer deal on a home at the auctions are only increasing.
Lender Processing Services (LPS) explains that the number of foreclosures in the United States has steadily risen for five straight months in a row and that the current foreclosure inventory in the United States is about 7.7 times the historical average.
The foreclosed homes are out there, but if you want your chance at a foreclosure deal, you’d best be prepared to spend not only money, but a lot of time preparing…
THE AUCTION EXPERIENCE
The first step in preparing to buy a house at a trustee auction is to go down to the auction and see what the atmosphere is really like. Each county’s auctions are run a little bit differently, and you’ll want to know the ins and outs of the auction in your particular area long before bidding. Pick out one week and go to the auction every morning. If you can’t make it down there because of your work schedule, consider having a friend or relative experience the action and report back to you.
Fair warning: If you have a full-time job (and you aren’t in real estate), it could be challenging to find the necessary time to prepare to bid at a housing auction and do the necessary research.
When you’re at the auction, get a feel for the bidding process and the way that people act. Notice, for example, that most bidders wear sunglasses and keep their hands in their pockets; these tricks help them from showing their emotions whether it be excitement or disappointment.
Once you understand the auction process, you’ll want to start tracking foreclosures.
Notice of Trustee Sales or Sheriffs sales are published in a local newspaper weekly for a few weeks before they are sold at auction. But just looking in the newspaper won’t give you the up-to-date information you really need.
Instead, research different foreclosure tracking tools. ForeclosureRadar is one of the best services I’ve found to find pre-foreclosures in your specific criteria such as zip code, age, number of beds and baths, etc. and track them all the way to their auction date. You can even download a ForeclosureRadar application to your phone so that instead of printing out a daily list and bringing it with you to the auction, you can just pull out all the details of the day’s auction on your phone. That said, ForeclosureRadar isn’t free and it’s not available in all 50 states, so you may have to do some research on your own.
Next comes the due diligence on the homes that you’re following.
Liens and Lien Positions
Follow the published starting bid on your list (which can change), and look at the position of the lien that is initiating the foreclosure.
NEVER, EVER buy a lien in second position, or any lien that isn’t first position for that matter, unless you know exactly what you’re doing.
If you bought a second position lien at auction, your purchase will still be subordinate to the first position lien, which could foreclose, wiping out the subordinate liens, so all the money you spent would be a waste.
Order a preliminary title report from a title company. Some title companies will charge you for this, and others will provide it for free if they feel they have a good chance of getting your business. Because the auction purchases come with all existing liens and encumbrances, a title search in the form of a preliminary title report will help to identify things like IRS liens or past-due taxes that you, as the new buyer, must pay.
The Condition of the House
Some investors don’t care much about a foreclosed house’s interior appearance, but if you plan on living in it for a while or even fixing and flipping, the inside should concern you at least somewhat.
Getting access to the inside of the home before you bid on it is desirable but not always possible. If you have access to the Multiple Listing Services through a broker or real estate agent, you may be able to pull up pictures from an old listing when the house was for sale. Keep in mind those pictures might be quite different from the current condition of the inside of the house. You may choose to peek in through the windows or “accidently” slip in if it’s vacant, but be aware of the laws and your safety!
Also, do your due diligence on several homes that you’d want to buy and not just one, because it’s likely that the one you have your eye on may either be delayed (and delayed, and delayed) or sell for a higher price than what you’re willing to pay.
Calculate the maximum bid for each property that you are interested in. Write it down and stick to your maximum bid, not a penny more. It’s easy to get carried away with the emotion of bidding wars, but being willing to let a property go is your safety net.
Many of the online tracking systems have tools for estimating ARV (after repair value), but a more accurate way would be to pull recent comparables and calculate the cost of estimated repairs yourself. A friendly contractor can be very helpful in helping you price out tools and labor of any repairs that you think might need to be done. If your goal is to fix and flip the property, you need to take the ARV and subtract the repair estimates, your holding costs, listing expenses if you’re going to list it with a Realtor and the profit that you want to take as well.
Where are you getting the money?
You didn’t expect to go to a bank and ask them for a mortgage to fund your auction purchase, did you? Due to the risks involved in buying a home at auction, that’s not going to happen.
Every state has slightly different laws about buying houses at auction.
In Arizona, for example, you only need to put an earnest money deposit down at the auction, but you’ll only have a few days to pay in full. In California, you must pay in full at the auction steps. Therefore, you’ll need to bring a cashier’s check of the full amount of your maximum bid with the trustee’s name on it. If you get the property for less than your maximum bid, you’ll receive a refund.
Many people, however, don’t have enough money to pay cash for a house. Instead, they use “hard money”.
Hard money is a term used to describe money borrowed from a private investor. The investor lends you the cash at a high interest rate (typically 12%-18%) and looks forward to you not being able to make the payments back to him so that he can take the property. Hard money can be risky, but if you can afford to make those payments and you think you’ll sell the property fairly quickly, it can work.
If You Want to Live In the Home
It would never be worth it to use hard money to buy a house that you’re going to live in though, since the hard money loans are short-term and high interest.
If you’re wondering if you can save money by buying a foreclosed home to LIVE IN and you DO NOT have a lump sum of cash (from savings or an inheritance, perhaps), auctions aren’t the way to go. Instead, your best bet is to work with a real estate agent and view foreclosures that are on the regular real estate market. You may still find big savings and, depending on the home, may be able to qualify for traditional bank financing.