How do Foreclosure Auctions Work (Industry Expert Tips)

by Tara Caruso

Updated

Foreclosure auctions are a process that is used to sell property that has been seized by the lender. 

The lender will usually seize the property when the owner has failed to make payments on their mortgage. They can be a great way to get a deal on a piece of property, but can also be risky. 

We will discuss how foreclosure auctions work, and whether foreclosure auctions are worth it.

What is a Foreclosure Auction

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A foreclosure auction is a public sale of a property that has been repossessed by the lender.

The sale is held in order to recoup the unpaid balance of the loan, and is an alternative method to sell a home or property of the lender.

Properties are generally sold at a foreclosure auction if the borrower has defaulted on their loan or if they have failed to repay their debt within a certain period of time. 

The auction is open to the public and is typically held at the county courthouse. 

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Bidders must be prepared to pay the full amount of the loan in order to purchase the property. In most cases, the property will be sold to the highest bidder. 

Foreclosure auctions can be a great opportunity to purchase a property without an inspection at a discounted price.

However, it is important to do your research prior to bidding, as you may end up purchasing a property that needs significant repairs.

Tactic for Success

If buying a foreclosed home as an investment use the 70% rule. The 70% rule is a guideline to follow when placing your bid on a property. The idea behind the 70% rule is that an investor should offer no more than 70% of the after repair value (ARV) minus the repairs needed.

How to Get a Loan for a Foreclosure

How to get a loan for a foreclosure auction? If you’re interested in purchasing a foreclosure, know that it is hard to get a loan and a lot of auctions require cash purchases. 

However it is possible to get a loan. You will want to research what kind of loan you’ll need and if you can be pre-approved. 

You’ll likely need to put down a larger down payment than you would for a non-foreclosed home. 

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This is because foreclosures are considered to be high-risk investments. As such, lenders will want to protect themselves by requiring a larger down payment. 

This may make purchasing and selling a home at the same time more difficult than under normal circumstances.

In addition, you’ll need to have good credit in order to qualify for a loan. 

This is because lenders will be hesitant to give loans to individuals with poor credit histories, as they are more likely to default on their payments. 

Finally, it’s important to be aware that foreclosures can often come with hidden damage. 

This is because previous owners may have failed to properly maintain the property, resulting in expensive repairs that you’ll be responsible for. 

As such, it’s important to have a realistic expectation of what you’re getting into before purchasing a foreclosure.

Tactic for Success

Use a hard cash loan. Hard cash loans are short-term loans that are typically used for investment purposes. These are typically short-term, high-interest loans that are backed by collateral. This means that if you default on the loan, the lender can take possession of the property. So it is important to understand the risks involved before signing any loan documents.

Are Foreclosure Auctions Worth It

Foreclosure auctions are a great way to get a deal on a property, but they are not for the faint of heart. 

The process can be confusing and frustrating, and there is no guarantee that you will end up with the property you want. 

However, if you do your research and are prepared to be flexible, foreclosure auctions can be a great way to find your dream home at a bargain price or even a first step at starting a property management company.

The key is to understand the process, to be patient and to be prepared that the home may come with unexpected repairs. 

With a little bit of knowledge and some careful planning, you can find yourself in a great new home at an unbeatable price.

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Trend on the Rise

Bypass the auction process altogether and go directly to the homeowners in foreclosure. By making an offer directly to the homeowner, you can avoid the potential pitfalls of the auction process and have the opportunity to inspect the property beforehand. This way you can be sure of what you’re getting yourself into and help the homeowner avoid foreclosure.

How to Be Successful Buying From a Foreclosure Auction

The foreclosure process can be a long and complicated one, but it offers opportunities for buyers to get a property at a discount. 

When a property is scheduled for foreclosure auction, the starting bid is typically set at the outstanding balance of the mortgage. If there are no other bids, the property will be sold to the lender. 

However, if there are other interested buyers, the bidding can quickly escalate, making it difficult to get a good deal. 

To be successful when buying from a foreclosure auction, it’s important to do your homework in advance. 

Start by researching the property and its value, as well as the terms of the mortgage. 

It’s also important to have financing in place so that you can make a quick offer if you’re the winning bidder. With careful planning and a little luck, you can snag a great deal on a foreclosed property.

Trend on the Rise

Buying a foreclosed home online at an auction. More and more states are starting to allow online auctions of homes. The benefit of buying a foreclosed home online is that you can see all the properties that are being auctioned off at one time. This makes it easier to compare prices and find a good deal.

Basic steps for participating in a foreclosure auction:

  • Find Foreclosure Properties – Look for public notices of upcoming auctions.
  • Do Your Research – Know how much the bower owes on the mortgage and if there are any liens on the property.
  • Drive by the Property if Possible – This will give you a better idea of the property’s condition.
  • Get Financing in Place – If you plan on bidding, you’ll need to have cash or a loan lined up in advance. 
  • Attend the Auction and Bid on the Property – At the auction, you’ll be asked to sign in and present a form of payment.
  • Pay for the Property – If you’re the winning bidder, you’ll need to pay for the property in cash or with a loan.
  • Take Possession of the Property – The deed to the property will be transferred to your name this could take up to 10 days. Do not do any work on your home until you have it.

The Risks of Buying at a Foreclosure Auction

While foreclosure auctions can be a great way to get a good deal on a property, there are also some risks involved. 

You will need to be prepared for potential regret if things don’t go as planned, similar to the risk involved in buying other properties or wondering if you will regret buying a mobile home.

One of the biggest risks is that you won’t be able to inspect the property before making a bid. 

This means you could end up paying more than the property is worth, or taking on significant repairs that you weren’t prepared for. 

There is also the risk that the previous owner will try to contest the foreclosure, which could delay your taking possession of the property. 

And finally, if there are other liens on the property (such as unpaid taxes), you could be responsible for paying them off before you can take ownership. 

Given all of these risks, it’s important to do your homework before bidding on a foreclosed property. 

But if you’re willing to take on some risk, a foreclosure auction can be a great way to get a good deal on a new home.

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How to find homes in foreclosure:

  • Foreclosure Specific Websites – Like RealtyTrac.com and Auction.com are away to see homes in foreclosure. Just note that information is not always accurate.
  • Contacting Local HUD Offices – You can find your local HUD office by visiting hud.gov and searching for their contact information. You can ask for a list of homes in pre-foreclosure or foreclosure.
  • Online Listings – Websites like Zillow and Redfin usually have a section for homes that are in foreclosure.
  • Attending Foreclosure Auctions – If you want to buy a property at a foreclosure auction, you’ll need to do some research in advance to find out when and where the auctions are taking place.

Wrapping Up

Foreclosure auctions can be a great way to find a property at a discount, however, there are risks involved. 

It’s important to do your homework before attending an auction and be prepared that the house may have hidden damage or other problems.

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About the Author

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Tara is a licensed real estate agent in Southwest, FL. She helps buyers and investors find their dream home by educating them about real estate and how they can use it as an investment.