How NOT to Buy a Foreclosure

Buying a foreclosed house at a sheriff’s sale or county auction can be a great way to find a bargain on real estate, but it can also be a great way to lose a lot of money in a hurry.

The foreclosure landscape is littered with buyers who didn’t do their homework, and as a result either didn’t get a great deal or worse, lost their life savings.

It doesn’t have to be that way. Watch the following news story I did about a novice who came very close to losing a ton of money, then meet me on the other side for more.

As you saw in the story above, Vanessa thought she was buying an $80,000 condo for $14,000 at a foreclosed property auction. But because she hadn’t done a title search, she didn’t know that what she was actually doing was paying $14,000 to satisfy a delinquent second mortgage on a condo that still had a $140,000 first mortgage on it.

Here’s what would have happened if Vanessa hadn’t had the luck to meet foreclosure expert Louis Valdeon in line at the county courthouse. She would have given the county clerk a non-refundable cashiers check for $14,000. Then she would have moved in to her bargain condo, blissfully unaware that there was a giant first mortgage still due on the property. She would have spent money fixing it up. Then, weeks or even months later, she would have received a notice that now she was in default on the $140,000 first mortgage.

Result? Vanessa would have been in the exact same position as the previous hapless homeowner: owing $140,000 on a $80,000 condo. If she refused to pay, she would have been foreclosed and lost the property, her $14,000, any money she’d invested to fix it up and her good credit score.

Unfortunately, this story isn’t at all uncommon. Every day, especially in cities like Miami (where Vanessa lives) that are rife with foreclosures, novices are making uninformed bids on foreclosures and losing their life savings. That’s why experts like this one we interviewed last year say that foreclosure auctions are no place for amateurs. And why nearly all the articles you see online, like this recent one from CNN/Money, also suggest avoiding sheriff’s auctions. Their advice is to buy foreclosed properties after the expert or the bank wins the foreclosure bid and resells it through a real estate agent.

But as you saw from our news story, even though she nearly made a huge mistake, Vanessa didn’t give up. Instead she learned how to check for mortgages and other liens, then gave it another shot, ultimately buying a different condo at auction for $50,000 that she says is worth $100,000.

So here’s how NOT to buy a foreclosure: blinding bidding in an auction without understanding how the process works. While buying real estate at a sheriff’s auction isn’t rocket science, it’s not something to be approached lightly. Before you even consider it, understand the following:

• You must have all cash for the entire purchase price. In general, property bought at a county foreclosure auction (sheriff’s sale) must be paid for in full within 24 hours: there’s no time to get a mortgage.
• You must conduct or pay for a title search to uncover any mortgages or other liens that might be on the property. If you fail to do this, as Vanessa initially did, you will not get your money back or any second chance.
• You may have to buy the property without the opportunity to inspect it: the exact opposite of what you should do when buying a house. Without an inspection, you won’t be able to estimate the fix-up expenses. And with foreclosures, that could be a lot: that’s the single biggest reason these properties go cheap.

Now you can see why so many experts and articles don’t want you to go this route. But if you still can’t shake the thought of buying a $100,000 home for $50,000, then do what Vanessa did: take the time to learn to do it right.

What did Vanessa do? She took a short course on foreclosure investing. I’ll show you what that looked like in my next story, aptly entitled How to Buy a Foreclosure.