If you’re a handy DIYer, are looking to invest in real estate, or just want a budget-friendly first house, then foreclosed homes can be pretty tempting.
Often auctioned off at bargain-basement prices, they come with seemingly low up-front costs, leaving plenty of room in your budget for some paint, a few contractors, and that fully personalized home you’ve been dreaming of.
But foreclosed properties aren’t for everyone — no matter how handy you might be. Are you thinking of buying a foreclosed home at auction? Make sure you know what you’re getting into first.
How Foreclosed Property Auctions Work
Foreclosed property auctions come in a number of formats and vary depending on your state and county. In states that have judicial foreclosure, meaning the process must go through the justice system, auctions are actually held at local courthouses. The assigned judge must rule in the lender’s favor, and the home is then released for auction.
In nonjudicial foreclosure states, a property trustee handles the auction. These auctions may be held at a local auction company, a community center, or even online.
On the buying side, the process is fairly similar across the board. There will be a starting price — typically the cost of what’s owed on the mortgage or possibly less — to help garner interest. Buyers can then bid upward until the auction closes or bids have ceased.
Usually, the highest bidder wins, though in some cases, the lender may get to choose which bidder gets the home.
Winning bidders will need to pay auction fees, bidding fees, and earnest money before leaving the auction. They will go through escrow and closing, just like with a traditional home purchase, in the following weeks.
Pros and Cons of Buying a Foreclosed Home at Auction
The biggest benefit of buying a foreclosed home at auction is the price. In most cases, buyers can get more for their money than they would on the open market, meaning a larger, more expansive home than they’d traditionally be able to afford.
The major downside to buying a foreclosure? It’s a lot of risk. There might be major problems with the home (many auctions do not allow for home inspections), and many foreclosed homeowners do serious damage to their properties before leaving the premises.
There also may be hidden costs. Because foreclosures also require you to pay off any loans, overdue taxes, back interest, and even things like attorney’s fees, the final cost can end up much higher than the original auction sticker price.
Finally, it can also be very competitive. Fix-and-flip investing is pretty popular, and investors will come from all over for the chance to snap up a decent property at a low price. In many cases, these will be highly experienced investors who know the bidding and auction processes well.
Low up-front price
More house for your money
Lots of opportunities to upgrade and customize the house
Potential hidden costs and legal issues
Highly competitive in certain markets
Possible unknown property issues
What to Keep in Mind Before You Buy
Foreclosed homes can come with a lot of baggage. Many will have liens against the property for the previous owner’s unpaid taxes, insurance, or even things like overdue child support. You’ll have to pay these off or settle the accounts with each lienholder directly. This can take lots of time, money, and resources if you’re not well-versed in the process.
There’s also the chance that the homeowner files for bankruptcy on the day of the auction. If this happens (and you’ve already purchased the home), you might have to wait a while to get your money back. You also will need to bid on the home at another auction once the lender puts it back on the market.
Is a Foreclosed Home Right for You?
At the end of the day, it’s important to weigh the pros and cons, consider your goals as a homeowner or investor, and take a hard look at your finances and ability to improve the home before buying a home at auction. Though a foreclosed home may seem appealing on its face, there are a lot of nuances to buying these troubled properties — and knowing the full scope of what you’re getting into can help save time, cash, and serious hassle.