You can get a real steal at a house foreclosure sale--or you can overpay for a money pit. Here’s how to avoid the latter.
Step 1: Know your auctions Know your auctions. At a sheriff’s, trustee’s, or courthouse auction, you can’t inspect the property in advance; no information is provided on the property; you’ll need to pay much or all of your bid on the spot, in cash or a cashier’s check; and it will be your problem to evict the tenants! But this is where you’ll find the deep discounts.
Step 2: Play it safe If you want to play it safe, go to an auction house sale. The bank already owns these properties (so you won’t have to kick anyone out), and you’re usually allowed to inspect the premises beforehand. But this comfort level comes at a price--you’ll typically pay 90% to 95% of the market value.
Step 3: Expect the worst Expect the worst with any house you buy at auction. If a homeowner couldn’t afford his mortgage, it’s reasonable to expect he wasn’t keeping up with maintenance and repairs, either.
TIP: Be aware that homeowners who are forced out of their houses sometimes express their bitterness by taking with them anything that isn’t nailed down, leading to huge (and unanticipated) repair bills for the new owner.
Step 4: Do a drive-through Drive through the neighborhood of any foreclosed home you’re considering. If the area is teeming with foreclosure signs, prices are likely to fall even farther. It also may be the sign of an area on the decline.
Step 5: Check what you can Check out as much as you can about the house in advance of the auction. If you’re allowed to do an inspection, take a contractor with you; he’ll be able to give you a ballpark number on the repairs you’re looking at. Check if there are any liens on the home. Review the title search. Know what other homes in the area are worth.
Step 6: Have cash Be prepared to pay on the spot a 5% deposit, in cash or a cashier’s check, if you have the winning bid at an auction house sale. At a sheriff’s sale, you might have to pony up the full amount.
TIP: Have realistic expectations. Banks aren’t in the business of giving away homes, so if a price sounds too good to be true, it probably is.
Step 7: Come with pre-approved financing Come with pre-approved financing, even if the auction doesn’t demand it. If you make the winning bid and then find you can’t get financing, you’ll still be legally responsible for paying 25% of your bid!
Step 8: Look affluent Attend the auction in your most expensive clothes. It will trick other buyers into thinking there’s no point in getting into a bidding war with you.
Step 9: Set a limit Set a limit as to what you’ll bid so you don’t end up overpaying for a house simply because you got caught up in the heat of the moment.
Step 10: Avoid nasty surprises Know the rules of your auction. If you win a bid, do you have time to change your mind, or will you have to pay a penalty if you back out? Is there a 'reserve amount'—an amount below which the owner does not have to sell, even if you won the bidding? Is there a 'buyer premium'—an additional 5% to 10% you have to pay the auction house?
Step 11: Jump right in Jump right in when the bidding starts--assuming you like the house. Homes sold at the beginning of an auction typically go for less money than those sold at the end.
FACT: Due to the 2007 real estate market crash, the Senate voted to give a $7,000 tax credit to anybody who buys a foreclosed home.