Buying at a foreclosure auction requires that investors have lots of cash and a clear idea as to how much they are willing to pay for a property. Understanding all the details about a foreclosure auction, conducting thorough due diligence on the properties up for auction and defining clear objectives for what one plans to do with an acquired property, are all key components to consider before bidding at a foreclosure auction. The following article from REIClub has more on this.
Perhaps the most well-known method of obtaining foreclosure properties is buying them at the auction. The foreclosure auction is a live bidding process, just as you may have imagined. The auction is typically conducted at a public place, such as a courthouse. In some states, the county Sheriff or his deputy will conduct the sale. In other states, a referee appointed by the court will conduct the sale. Although the process is slightly different from state to state, the basic idea is the same – the property goes to the high bidder. The first bid will usually be made by a representative of the foreclosing lender. The lender can bid up the amount that is owed to him, without actually tendering money. If nobody else bids, the lender gets the property. In a majority of cases, nobody will show up but the auctioneer and the lender’s representative. Thus, in most cases, the lender gets the property; the less equity in the property, the less people show up at the auction.
Buying at the auction is not for everyone, especially beginners with limited funds. You need cash, and lots of it, to buy properties at auction. If you have access to a large credit line or have a money partner, you can sometimes find real bargains at foreclosure auctions. Do not get too excited, though, because most properties either have too little equity for people to bother with, or have so much equity that a large crowd will show up to compete. Despite popular beliefs, a real steal at the auction is very unlikely.
Finding Out Where the Auction Is Held
The auctions for your city or county are usually published in a legal newspaper or the legal section of your local paper. You can also subscribe to information service providers that will fax, mail and/or email you this information on a regular basis. If you are following a particular property, contact the lender’s attorney or the trustee for information about the sale date. Call the day before to make sure the auction has not been postponed or delayed by the lender or by the borrower filing for bankruptcy.
Before Going to the Auction
Before you even consider bidding at the auction, you need to do some homework. Remember that your bid at the auction is absolute; there is no backing out. Your due diligence in researching the property can be quite time-consuming, and chances are you will not get a huge bargain. Sounds discouraging? It is, but you should try it a few time to get a feel for the process. Choose a few neighborhoods that can familiarize yourself with and bid only on those properties.
Check the Condition of the Property
You need to drive by the property to find out what condition it is in. Good luck in trying to get inside, since the homeowner isn’t likely to let you in. If people are living in the property, you can make the assumption (most of the time) that there is running water and electricity in the house. However, you must assume the house needs at least the basic cosmetic upgrades: carpet, paint, new appliances, new kitchen cabinets, new vanity in the bathrooms. If the house looks vacant, take a peek inside the windows. The less information you have about the inside, the more conservative you need to be with your fix-up estimates.
What to Bid?
Before you bid on the property, the most important factor you need to think about is what you intend to do with the property if you win the bid. Are you going to live in it? Fix and sell it for cash? Flip it “as is” to another investor? Finance it and rent it out? Each one of these strategies will change your maximum bid price. I would suggest that you take the most conservative approach, that is, ask yourself what price you would need to pay if you had to resell the property quickly. In other words, don’t bid what you think will be the high bid, rather bid what you want to pay!
What You Need to Bring to the Auction
Contact the attorney, referee, sheriff, trustee or other official to determine how much money you need to bring to the auction. In most cases, you must bring a percentage of the winning bid price (usually 10%) in the form of certified funds, the balance being due in 30 days. In some states, the entire balance is due the day of the sale. Rather than bringing one certified check or money order, bring several smaller denominations, since it makes giving the deposit easier.
Tips for Buying at the Auction
You must arrive on time. Most auctions begin and end in a matter of minutes. If the auction is set for 10:00 am and you arrive at 10:05 am, you may be too late! If you are going to a county building, it will likely be in a part of the city which parking is a problem, so arrive extra early. Get a feel for the other bidders at the auction. It won’t take you long to figure out who is a pro and who is a “looker”. Even if you don’t buy the property, make friends with the pros so you have someone to sell other properties to at a later time. Don’t get in a bidding war! Many beginners get caught up in “bidding fever.” Don’t be one of them. Determine what you want to pay before you come to the auction, and don’t bid any higher!
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 600 transactions. He has appeared as a guest on numerous radio and television talk shows including CNBC Power Lunch. He has been featured in Who’s Who in American Business, Money Magazine, the Los Angeles Times and the Denver Business Journal. William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996.
This article has been republished from REIClub. You can also view this article at REIClub, a real estate investment education site.