Everyone talks about buying foreclosures for a steal, and countless popup ads pitch local foreclosure listings to Average Joe Homeowner. But do you know anyone that’s actually bought one? Or anyone that’s even been to a foreclosure auction? Probably not.
There are a few things you need to know about foreclosures and auctions generally before you go spouting credit card digits to the local foreclosure listing service. Yes, you can score a great deal, but more likely you’ll find yourself in over your head.
Finding auctions and preparing
First of all, how do you find auction listings? Don’t pay for a service; all foreclosures must be advertised for a set period of time before the auction (the specifics vary state to state). Typically each county’s newspaper contains the ads, so you can sift through them for free.
Now that you’ve found them, keep a few rules for foreclosure auctions in mind:
Observe a few of them before bidding: On the most fundamental level, you’ll need to understand the procedures: showing proof of funds for the deposit, comprehending the legal description, etc. But beyond the syntax of auctions, there’s a rhythm to them, that you must develop a feel for, un-scientific as that may sound.
Be prepared: You wouldn’t bid on an antique without knowing the history behind it. Likewise, do your research on the property and the neighborhood. When was the house built? How many square feet does it have? How many bedrooms? Bathrooms? Has it been renovated recently? What kind of updates does it need? What are the comparables selling for? The list goes on, but the important question is: What is the property worth right now?
Once you have an idea of what it’s worth, you can decide what you’re willing to pay for it. You can probably guess the third rule of auctions:
Know beforehand what you’re willing to bid, and stick to it: You’ll be tempted to bid that extra five hundred dollars, which of course balloons to an extra five thousand dollars very quickly. Beware of spending too much just because you want to win.
Financing your purchase
So you’ve been to a few dozen foreclosure auctions and you finally scored a bargain. What happens next?
You’ll hand over your deposit, and then you’ll need financing—quickly. You may already have a relationship with a lender, but if not, you’ll have to move fast and talk to several. Some buyers prefer hard money lenders, because they’re fast and relatively easy to work with, but of course they charge accordingly. Other investors prefer small, local banks, because you can still create a relationship with them and potentially move quickly, while avoiding hard money rates and fees. Either way, the question is speed, because you’ll lose your deposit if you don’t settle fast.
Finally, it’s worth noting that it’s a small pool of investors who routinely buy at auction. You’ll recognize the same faces over and over again, which means you’ll need to play nice with the other kids in the sandbox. Have a hoagie with them, buy them a pint at the local watering hole, get to know them. Find out what lenders they borrow from, who their realtors are, what neighborhoods they think are hot. Competition is part of any business, so you might as well learn a thing or two from them, and where possible cooperate. It will make you a better investor, and more likely to succeed in the future.