Watching HGTV would have you believe that buying a foreclosure property at auction is super easy. You simply look at an ad in the newspaper over breakfast while you get the kids ready for school, you drive down to the courthouse steps where you and 6 other unsavory-looking characters stand in a semi-circle and then you start bidding. Of course, you always seem to win the deal. That’s real life…right?
Unfortunately, it’s really not that easy. Different states do things in their own way, but one thing is for certain…it’s a lot harder to buy a foreclosure property than the show on TV.
In a deed theory state, such as Missouri, Alabama, and North Carolina, foreclosures are typically done outside of the court system. The lender’s attorney goes through the process and then they conduct a private auction for the property, many times at their office. Foreclosures in deed theory states fly through the process. In many cases, a foreclosure is done within 120 days from the time the foreclosure was initiated. In a lien theory state, however, the process takes a little longer. Your attorney must first file a lis pendens to start the case. They then have to navigate the court system to get to the foreclosure sale. This can take one year, two years, or even more.
Regardless of what jurisdiction you are buying in, you are going to face competition. You are not the only person that had the brilliant idea of buying homes at the foreclosure auction. You are not only up against other potential investors, but you’re bidding against the lender themselves. Lenders turn in a bid to the auctioneer to purchase the property prior to the property sale. They get a credit of how much the borrower owes plus late fees, interest, legal costs, etc. It has been our experience that most lenders bid the maximum amount of their credit, which often times (if not usually) is greater than the as-is value of the home. Most of the auctions we see have the lender winning the bid.
I can’t sugar code it…most real estate investors are simply stupid. They buy from a place of emotion rather than doing the math on a potential deal and then bidding with discipline. In almost every auction we see that goes to an investor rather than the lender, they overpay for the deal. They get caught up in the feeding frenzy that is the auction and they make stupid bids. They win, but they soon find that they lost as they lose money on the deal. Many jurisdictions do their auctions on-line. This sometimes adds to the video game feel of the moment where bidders forget that they are not playing a game…they are bidding for real.
The due diligence you have to do on a property prior to making a bid is the same as you would if you were buying a deal from a wholesaler. You drive by the property, peek in the windows, determine what the ARV is of the property, determine the cost to fix the place up, determine what your profit margin needs to be, factor in the time value of the money if you were to borrow from a lender, add in a buffer for unexpected contingencies that always seem to pop up. You’ll spend hours prepping only to have the vast majority of your properties go back the lender or they are purchased by a newbie that gets caught up in the moment and overpays.
It is true that you can find great bargains at a foreclosure auction, but be prepared for all of the hard work that you will have to put in on many, many properties for each one that you win. It’s not at all like what you see in TV. It’s much, much worse.