Focus on Foreclosure, Part 2
Finding Gold at Foreclosure Auctions

By Jordan Taylor

Foreclosures are on the rise in the U.S., creating tremendous opportunities for savvy investors. In this second of a three-part series, Jordan Taylor looks at how to buy foreclosures at the auction.

Last month we talked about how to do preforeclosure investing, which essentially means to help a homeowner stop the foreclosure process. For a variety of reasons, this strategy doesn't always work. The homeowner may wait until it's too late, may not be willing to negotiate, or may not even realize this is an option. Or the lender may not be willing to work with you on the deal. Whatever the reason, if the foreclosure isn't stopped, a judgment is entered, and the property is put up for sale at auction.

The auction will be held at the local courthouse or another location depending on the laws of the particular state. Typically, the date, time, and place of the sale is published in the local legal notices. Your county clerk's office can provide you with the information you need to attend and buy at the auction.

Foreclosure auctions usually don't attract big crowds. Most of the time, you'll see about ten or twenty people watching and maybe just one or two actually bidding. It's common for the lender to open the auction with a bid in the amount being foreclosed on; that way, the property is sure to be sold for at least what is owed on it. If that's the only bid, the auction is over. If there are multiple bidders, the property is sold to the highest bidder.

In most cases, you'll need cash or certified funds at an auction, although some states allow you to bid with as little as 10 percent at auction and the balance to be paid within 24 hours. If you don't have cash of your own, look for a funding partner to work with.

Try before you buy

It's a good idea to attend a few auctions before you're ready to bid just to see how they operate. Unlike other types of auctions, foreclosure sales are generally low-keyed, but you might see some prospective buyers get into a heated bidding war and drive up the price of a property. Always set your limit before the auction and if the price exceeds that amount, stop bidding and let the property go to someone else. Don't get caught up in the excitement and run the price up so high that it isn't a good deal. If someone else wants to pay more, fine. You'll find another property you can make money on at the price you're willing to pay. You don't lose at an auction when you don't win the bid; you lose when you exceed your bid limit and eliminate your profit margin.

Never bid on a property without researching it first. Go take a look at the property; in most cases, you will not be able to see the interior, but at least drive by and look closely at the outside. If the property is vacant, walk around and look in the windows. Compare it with similar properties that have sold in the neighborhood within the past six months. Do a title search to be sure you can get a clear title; though most junior liens are wiped out through the auction process, some—such as tax liens—are not. Always assume that a foreclosure property is going to be distressed and in need of repair and allow for that when calculating your maximum bid. If it turns out the property is in better shape than you anticipated, that's just more profit for you.

Though it's common for people to abandon a house before the foreclosure auction, that's not always the case. If the house is occupied, the typical procedure at the end of the auction is for the sheriff to put a notice on the door of the property telling the residents they must vacate by whatever date state law requires (usually seven days). Because it's possible that some people will damage the property during this period, you may want to consider only bidding on vacant properties.