Not as Seen on TV: a Guide to Foreclosure Auctions

[Lamar George]

I wanted to share an article written by a good friend of mine. What do you think?

Even if you are new to real estate investing, you likely know what a home auction is. You’ve probably even seen one on a TV show where people buy a house, and after thirty minutes of airtime have completely renovated and sold a home. Just as the shows can give an inaccurate representation of the rehab process, they can poorly portray an auction, too.

Foreclosure auctions are a viable way to purchase a hot deal with a healthy profit margin, but let’s clear up some misunderstandings.

If you’ve never been to a home auction, I recommend putting one on your calendar to attend. If you live in or near a city, you won’t have to look hard to find one. They usually take place weekly, if not daily in some areas, and are highly educational.

But, what if you aren’t in a position to buy a home at auction yet? Should you still attend?

Absolutely. And if you can, go with someone who will be purchasing a property to see how they do it. I don’t recommend going in blind, however. Here are 6 things you need to know about real estate foreclosure auctions before you attend.

1. You need cash to bid.

If you attend an auction and plan to buy a property, you need to make sure either you or a partner has the money to place a bid or make a purchase. Very few online and TV advertised auctions have available financing.

If you don’t have cash, should this stop you from attending? No! An auction is an excellent place to network. You see that guy over there that just purchased a house for $80,000? Let’s say you’ve run the numbers on the property and the MOA (maximum allowed offer, or bid in this case) is closer to $100,000 to allow enough profit after repairs. Go over to that guy with a business card and make him an offer!

If you say, “Hi there, I’m a real estate investor, too. You just purchased that property for $80,000. How would you like to sell it to me right now for $85,000?” What do you think he’ll say? With a little paperwork and almost no time invested, he’s just made $5,000 (unless he’s smart enough to counter), and you just got a house that you can finance with private money.

I tell people to do this to me at auctions all the time, and they rarely do. It blows my mind! Take the opportunity.

2. Anyone is allowed to bid at auctions.

Some foreclosure auctions require a bidder’s fee of a minimum amount (i.e. $10,000) to prove you have money. You may have to arrive at an auction with a cashier’s check made out to yourself to prove you have money. If you win the bid, you have to sign over your cashier’s check and the remainder of the amount by the close of the next business day. The deed will come in the mail 2-3 weeks later.

(Check the individual rules for each state and each auction as they vary. This is an example.)

Do your research on what the auction requires and be prepared.

3. Always know what lien you’re bidding on.

A property lien is “a legal claim on a tract of real estate granting the holder a specified amount of money upon the sale of the property. Such liens are often used to ensure the payment of a debt, with the property acting as collateral against the amount owed. A mortgage is the best example of a property lien.” (Definition according to Investopedia.)

Have you ever been to an auction where a “property” goes for as little as a few thousand dollars? There are markets where this happens, but the more likely reason is the bid is actually on a second or third lien against the property.

There’s money to be made in having a second or third lien position, but this can be an incredibly costly mistake if you don’t know what you’re doing. You do not want to inherit all the other liens on top of your bid if you can’t afford to buy them and the numbers don’t make sense for you to finance it.

Let’s say you purchase a 2nd lien and inherit the first lien, which is of a substantial amount. You would need to pay that loan off, too, including any past due interest and foreclosure fees and any past due property taxes. The first lien could still foreclose on the property if the loan is not paid off on time to stop the sale. If the first is foreclosed, then anyone who purchased the 2nd could then be wiped out.

Know what lien you’re bidding on by doing your research first. If you want to attempt bidding on a 2nd lien because the property is oh so tempting, know what you’re doing first. In fact, I recommend having an expert on your side. 

4. Research the properties.

Before attending an auction, drive by the ones you’re interested in to get a good look at them and their context. Make sure you check the property condition and neighborhood. Check whether the property is vacant or occupied. Is it located on a major street or intersection? Kick the tires here, walk the perimeter, do your due diligence. It’s worth the small investment of time to make sure you’re not bidding on something that could sink you.

Also, find out whatever you can about the property. Knock on a neighbor’s door and ask a few questions. Pull the numbers on the property and the comps in the area. Arm yourself with as much knowledge as possible before you put your money where your mouth is.

5. Pay attention to “Redemption Rights.”

Check the laws in your state. Some states allow a homeowner to buy back the property within a period of time if they’ve lost it to foreclosure. You’ll want to be aware of this before you spend money on a property that isn’t yours yet.

6. Secure the property.

Once you own a property purchased at auction, and you are clear of any “Redemption Rights,” move quickly to secure the property. If the property is occupied, call your real estate attorney to start processing an eviction. Call your general contractor to discuss the work and estimates. Start changing locks, boarding up windows and cleaning up. Do a walk through to assess what needs to be repaired and build a budget. Don’t sit on a property, push forward ASAP. Time is money, especially if you have any amount of financing on the property.

2 Bonus Benefits of Attending Foreclosure Auctions:

1. Networking.

Even if you don’t approach a bid winner and offer to purchase their newly awarded property, you can still visit with a stack of business cards and network with people. This is an excellent way to meet people that you may someday wholesale a home to or purchase a house from one day.

2. Staying aware.

Not only do you keep an eye on other investors in your area (what they’re doing, who they’re working with, who you can work alongside), but you gain a consistent feed of information. You can find out which neighborhoods are consistently repeated at the auction (and are worth driving though) and at what amounts others are purchasing properties for.

By Lee Arnold