How to Buy a Foreclosure

Photo (cc) by NatalieMaynor

Note: This is the second story in a two-part series on buying foreclosed real estate at government auctions. If you haven’t seen it yet, check out the first story in the series, How NOT to Buy a Foreclosure.

For the typical home buyer, the process of buying a house entails driving around with a real estate agent, walking through countless houses, getting pre-approved for a mortgage, negotiating a price, paying for an expert inspection, then signing a slew of papers.

Now imagine the exact opposite: buying a house in less than a minute. No formal inspection. No mortgage. No real estate agent. No formal closing meeting and not much paperwork. That’s what it looks like when you buy a foreclosed property at auction from your local sheriff, county treasurer or other governmental agency.

As the number of foreclosed homes nationwide surpass historic highs, investors and some home buyers are finding what they consider the bargains of a lifetime. But while the prospect of cutting out real estate agents and mortgage lenders may seem tempting, buying a foreclosure is not for the faint of heart.

If you’re going to attempt to buy at a genuine government-sponsored foreclosure auction (as opposed to the heavily advertised but completely different types of auctions from companies like Auction.com) be prepared to do a lot of — if you’ll pardon the pun — homework.

The first question you should ask yourself: Is a foreclosure really right for you? It’s a question we first addressed last year in this video news story called Should You Buy a Foreclosure?

As we pointed out in that story and in the first part of this series, one major drawback for those seeking a foreclosure is that buying this way requires a lot of cash. You typically have to make a 5% deposit on a property before you can actually bid. Then, if you’re the successful bidder, you’ll be required to pay the entire purchase price within 24 hours of the auction. No mortgage money here, at least not until well after you’ve purchased the property. You will also have little, if any, opportunity to inspect the property before you bid on it. Finally, you have to be especially careful that the property you’re bidding on doesn’t have hidden mortgages or other liens that take priority over the one you’re bidding on.

So how do you do it right? Take a look at the following news story: we’ll continue the discussion on the other side.

As our expert said in the story above, important things to remember when buying foreclosed property at auction include:

  • Make sure you understand exactly what liens are secured by the property you’re bidding on. This generally requires paying a title company to do a complete title search on the property. Only then can you be sure that the price you’re paying will leave you holding good, free-and-clear title to the property. Depending on where you live and whom you hire, title searches can cost from $50 to $200. That’s money you’ll need to spend before you bid.
  • Look at the property. While you’ll almost never be able to obtain a professional inspection of a foreclosed property (the people who are losing their home might very well still be living there) you can at least drive by and do a curbside inspection. It’s not very helpful, since any property could contain major structural defects you can’t see from the yard, but it’s better than nothing.
  • Avoid overbidding. As with any auction, it’s easy to get caught up in the heat of the moment and pay more than you should. This is especially a danger when you’ve invested time and money in a property by fulfilling the steps above.

Now that you understand the rules for buying foreclosures, here’s something that might blow you away: With the exception of avoiding overbidding, many foreclosure professionals totally ignore them.

During the course of researching this story, I talked to the heads of three investor groups that have collectively bought hundreds of foreclosures in South Florida. These people bid on dozens of properties every day; some bid on hundreds. How can they possibly get full title reports on these properties? How can they drive by and inspect them all? Short answer: They can’t and they don’t.

According to the person I interviewed on-camera for this story, Luis Valderon, here are the steps some professionals follow to buy foreclosures in the Miami/Fort Lauderdale area:

  • They purchase a foreclosure list (here’s the one for Broward County Florida), which gives a brief summary of every property coming up for auction both on paper and online. The cost is $190 for one month, $480 for three months or $840 for six months. Here’s a sample. While this list isn’t nearly as thorough as a true title search, to those who understand how to read it, it does offer insight into potential mortgage and other potential lien issues on the properties.
  • They put up the required deposit to bid, then proceed to submit low-ball bids on any number of properties as they come up for online auction every weekday. In many cases, they don’t drive by the property or get a detailed title report before they bid.
  • If they win the bid, they have 24 hours to complete the sale by delivering a cashier’s check to the county treasurer for the full amount. During that 24-hour period, they drive by the property, do whatever physical inspection they can, and do a more complete title search. If something’s horribly wrong, they don’t show up to pay for the property and therefore forfeit their deposit.

Experience and training are two of the things that allow professionals to bypass some of the basics. But the main reason they can get away with not getting full title reports or even driving by properties they bid on is more basic: volume. They’re playing a numbers game. They’ll occasionally buy a property with structural defects or other major issues. They’ll sometimes buy a property with an undisclosed lien. And on those occasions they lose money; sometimes tens of thousands of dollars. But they more than make up for their mistakes by buying houses for $30,000, doing a quick cosmetic fix-up, then reselling them for $60,000 or more.

So how does an amateur compete and win at this game? By learning to do it right. Luis Valderon doesn’t just buy foreclosed houses. He’s also the guy that publishes the foreclosure list referred to above. And he provides free seminars to help people learn to use it, and thus avoid making some of the most common mistakes. It’s this seminar that enabled Vanessa Diaz (the person who almost messed up big-time in our How NOT to Buy a Foreclosure story) to learn what she needed to know to successfully buy a foreclosure.

Unfortunately, there’s not someone offering free classes on buying foreclosures in most cities. But there are public libraries and there are people with experience. Seek both out and avoid silly, overpriced courses offered online and by late-night TV. Wherever you live, the information you need is both available and free.

The bottom line of foreclosure buying? It’s certainly not for everyone, and it’s not for anyone without cash or unwilling to take at least some degree of risk and some training. If that’s not you, then look for a foreclosure that’s for sale by either one of these foreclosure pros or a bank: here’s a story about that.

But after researching this story, I’m going to buy Luis’ list, take his course and try it myself. Check back in a few weeks for a story called “Stacy Goes Foreclosure Shopping”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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