Buying a foreclosure at auction can be a great deal, but success requires plenty of preparation. These deals have some risks — limited inspections, tight deadlines, among other things — so considering what else goes along with the discounted homes is worth considering.
This guide outlines steps for assessing properties, calculating costs and making strategic bids, whether you’re a first-time buyer or an experienced investor.
Understanding Foreclosure Auctions
Foreclosure auctions are sales conducted by a lender when a homeowner risks losing their property. They occur when a lender reclaims a home from a homeowner who has not paid their mortgage. These auctions occur in person, typically at courthouses or online via bidding platforms.
Before you buy foreclosures at auction, you need to first learn how the auction process works and the type of foreclosure involved. Foreclosure sales come in two types by state law:
Judicial Foreclosure
This type requires lenders to go to court to get approval before selling the home. Because of the legal process and court dates, it often takes longer. In some states, homeowners are able to repurchase the home even after the auction during a limited time known as the “right of redemption.”
Non-Judicial Foreclosure
This foreclosure auction process bypasses the court if the mortgage contract contains a “power of sale” clause, so it’s usually quicker and cheaper. When the property is sold, the homeowner typically can’t get it back, and the sale is carried out by a trustee specified in the loan agreement. This is called a “trustee’s sale.”
Steps to Buying a Foreclosure at Auction
Knowing which properties to target and what risks they come with gives you an advantage when you buy foreclosures at auction. Here are the critical steps to ensure this process is done properly:
Step 1: Research Properties
Start your search by looking for foreclosure listings on auction sites or local government sites. These platforms frequently post properties listed for sale with potential addresses and starting offers. You can also find key facts like past ownership and tax histories through county records and public databases.
Step 2: Understand Auction Rules and Requirements
Each auction has rules, and it is crucial to know them to avoid mistakes. For example, most real estate auctions require pre-registration, often including personal information and proof of funds, such as cashier’s checks.
Payment rules can also differ. Many auctions require cash or certified funds, with a deposit due immediately after winning the bid — for example, 10% of the price.
Auction types also matter. With absolute auctions, the highest bid takes the property, regardless of price. Reserve auctions, by comparison, establish a minimum price. If it gets lower than that, the lender can just pull out. This impacts strategy — you might be safer bidding aggressively in an absolute sale, but reserve auctions require more caution.
Step 3: Perform Due Diligence
Before you bid, you need to know the property’s history; what you don’t know can cost you.
One way to learn crucial information is to check the property’s title history for hidden problems. This will inform you whether there are any unpaid taxes, liens or debts associated with the home. If the previous owner defaulted on $5,000 in back taxes, that bill will go to you after the sale.
Don’t forget zoning laws. Check that the property is zoned for your intended use — whether living in it, renting it out or flipping it. If it’s zoned for agriculture and you wanted to build there, you might not be able to. Also, look for rules regarding things like height limits or parking requirements. These can throw a wrench into your renovation plans.
Step 4: Secure Financing
Start by determining your exact foreclosure investment budget and whether to pay cash or use financing. Cash provides the flexibility of making offers that can close without full payment at the auction, as many auctions require this.
You must create your maximum bid by adding repair, liens and closing costs to your desired profit margin. If a house requires $20,000 worth of repairs and has $10,000 in unpaid taxes, you can deduct those from the house's market value to determine your maximum bid.
Step 5: Attend the Auction and Place a Bid
Before you arrive, have proof of funds and ID handy. Come early to study the bidding process, ask questions and notice how other participants conduct themselves.
You can always start bidding below your ceiling to allow room to go higher. For instance, if your max is $100,000, you might start at $70,000 and add or remove depending on what others do.
Step 6: Closing the Purchase
You may need to pay the final balance immediately after you win the bid. With auctions, you usually have 24 to 48 hours to pay in full after the auction, and you need to have the money ready or you lose your deposit.
Once payment is received, you’ll get the deed to the property. This document establishes ownership, so file it immediately with your county recorder’s office.
Risks and Challenges of Buying Foreclosures at Auction
When you buy foreclosures at auction, you can save a lot of money. Still, hidden costs and unexpected issues can quickly eat into your savings, defeating the purpose of buying discounted homes. Here are a few things you’ll need to watch out for:
- Unpaid taxes and other obligations can be transferred to you as a buyer.
- Poor inspections can overlook expensive problems, such as mold, electrical issues or structural damage.
- Bidding wars with experienced investors can inflate prices.
- Title disputes, zoning conflicts or ownership issues can hold up plans and add costs.
To minimize these risks, institute strict spending limits, verify ownership history and budget for the unexpected.
Benefits of Buying Foreclosures at Auction
You can buy homes far below market value, sometimes saving 20% to 30% of what the same house would sell for in a private home purchase. Auctions can eliminate seller negotiations, allowing you to close in weeks, not months.
Investors also gain exposure to properties, including residential and commercial properties, with no agent commissions.
Buying distressed properties can also help with fair competition — no secret backroom deals that manipulate price. First-time buyers also reap the benefits because stronger auction prices offer entry points into homeownership at less cost.
Smarter Ways to Build Real Estate Wealth
Fractional real estate and crowdfunding platforms provide an entry point to ownership for those who would prefer a more streamlined, lower-risk experience without auction headaches. You can buy in for less money upfront, share the risk with other buyers and have professionals take care of management.
To invest smarter, check out platforms that make owning real estate simple. You can lay the groundwork for building wealth by skipping the auction and finding your first opportunity on your terms.
Frequently Asked Questions
What credit score is needed to buy a foreclosed home?
Most auctions are cash sales, meaning that credit scores normally don’t come into play. Lenders establish their credit requirements if financing is involved.
Do banks usually negotiate on foreclosures?
Not at auctions — bidding sets the price. The only thing banks negotiate before foreclosure is a loan modification.
How much do foreclosed homes sell for at auction?
Prices can range from 20% to 40% below market value, but a more competitive bid or poor conditions can increase or decrease the price.