08 Jun Purchasing at Auction: A Risk that’s Worth the Reward
As inventory continues to deplete, investors are searching for opportunities in other avenues.
Recently, it has become increasingly more common for investors to pursue their next deal at the foreclosure auction. While many investors accept this new acquisition source, others remain skeptical.
Our auction division, Heaton Dainard Foreclosures, is asked the following questions regularly: What are foreclosed properties? How common are they? What are the risks and benefits of buying at auction? Are these properties a viable alternative to on market opportunities? You can find the answers to these frequently asked questions in the article below.
Foreclosed properties are homes that are in the process of re-possession due to the owner’s failure to make mortgage payments. The owners/borrowers have several chances to make these payments and reinstate the loan by paying off the default amount during a grace period. Since banks are not in the business of owning real estate, foreclosed properties are sent to auction in an attempt to find a new property owner.
“The purpose of a foreclosure auction is to get the highest possible price for the property, in order to mitigate the losses a lender suffers when a borrower defaults on a loan,” says Rick Sharga, executive vice president at Auction.com. “If the sale amount covers the outstanding mortgage debt and various foreclosure costs, then any surplus goes to the borrower. Bidders, on the other hand, are looking for investment bargains, so many homes sold at foreclosure auctions ultimately sell at something of a discount compared to traditional properties.”
Despite what you may imagine, not all foreclosed homes are in serious disrepair; property condition ranges from substantially distressed to move-in ready. Unlike buying a property on the Northwest Multiple Listing Service, homes are sold “as is”, with no opportunities for price changes, home repairs, or haggling.
According to a recent report by RealtyTrac, 1 in every 1,675 housing units in Washington is foreclosed. Washington has a foreclosure rate of .06%, slightly lower than the national average of .08%. Although the number of foreclosure filings in Washington is down 16.9% from this time the previous year, these properties still offer investors a viable alternative acquisition source.
The main risk of buying a foreclosure property is the lack of information that comes with each home. Oftentimes buyers are not able to see inside the property, or assess its condition, and foreclosed homes are sold “as-is” without warranty or inspection. There may also be issues with the title, as well as outstanding liens that would need to be dealt with. Despite these risks, properties that are sold at auction may be priced well under market value-securing a great post-renovation profit.
Buying at auction poses great benefits for the savvy investor. For starters, the actual bidding process is fairly transparent. You are able to see the other bidders and know the amounts they are offering, unlike submitting an offer on a house and playing the waiting game to see if it was accepted. Additionally, Trustee Sales’ offer an expedited acquisition process, meaning you often receive your property on auction day. Ultimately, the greatest advantage of buying at auction is the opportunity to purchase properties well under market value.
Don’t come to the auction unprepared. Do your research on the properties you’ve decided to bid on. This may include driving by the property(ies) you plan to bid on to better assess their condition, researching the neighborhood and finding comparable properties, and setting your maximum bid for each home. Additionally, if you’re a new investor we recommend pairing up with experienced investors before attempting to buy at auction. Trustee sales are often dominated by experienced investors and developers who come amply prepared.
Interested in buying at auction? Contact us at firstname.lastname@example.org to learn more about our foreclosure division and how you can get started.