Real Estate… Answered

Foreclosure auctions — are they good or bad? Before hunting them down and taking the (considerable) time to attend a foreclosure auction, you should know the advantages and disadvantages. Here they are:

Advantages

Buying foreclosures at auction has only two advantages, but they are biggies:

The Bidding Starts Low, Instead of High

When you’re buying a foreclosure from the bank, negotiations usually start at the full appraised value and you pressure them to reduce the price. At auctions, the opposite happens. The auction starts at the minimum value (usually, the mortgage balance) and buyers bid the price up.

It’s a subtle difference, but it can have a big effect on the price. You and the other bidders decide what the property is worth, not some appraiser. You might run into a great deal that no one else wants and pick it up for a steal. Or, you might be willing to bid higher than others but still end at a good price.

Either way, it’s always easier to go up than down.

Foreclosure Auctions Are Usually Less Crowded

Another subtle but important advantage is the reduced competition. With bank foreclosures, you’re competing against the entire market — investors, homebuyers, institutions. At an auction, on the other hand, you’re only competing with the other people in the same room.

Occasionally, no one will show up and you can offer the minimum bid on every property. I’ve heard stories about investors going to auctions during hurricanes or at other inconvenient times and buying properties at huge discounts.

Similarly, if a lot of properties are being auctioned, not everyone will do their research, and you may know something that no one else does. So, you might be willing to get a little higher and still get a great deal.

Disadvantages

Unfortunately, the disadvantages of foreclosure auctions are numerous. I would recommend staying away from them until you are more familiar with the business and other types of real estate investments. Here are four reasons why:

Auctions Require a Higher Binder (10%)

To discourage buyers from reneging, auctions require a high, nonrefundable binder. It’s usually 10%. If you’re just getting started in real estate investing, you may have to risk every penny of your savings just to make the binder, which is enormously risky. Since the binder is nonrefundable, you also have no room for error. If you mess up the financing or overestimate your buying power, you can lose the entire 10% deposit.

Less Time to Study the Real Estate Investment

When looking at bank owned properties, you can typically take your time analyzing the property and its market. You sometimes lose this luxury with foreclosure auctions. You might receive a list of the properties only a week or two before the auction, giving you little time to perform your due diligence. It’s easier to make mistakes.

You Might Have To Pay Additional Liens

Be careful with this one. Occasionally, a second mortgage holder will foreclose without liens like the first mortgage going into default. The auction will start at the balance of the second mortgage, but if you buy the property, you might automatically assume responsibility for the first mortgage. Unless you perform a quick title search on each potential real estate investment, you can get stuck with a truckload of unexpected debt, ruining the investment.