I received an email today with questions and concerns about a foreclosure sale. Great questions so I decided to post both the question and my response below.

What has been your experience with foreclosures?

Karen,
I have a question for you, I am not new to real estate investing but am new to foreclosure auction process…
there is a property that is going to be auctioned next month at our courthouse.
I have applied for pre-qualification with a standard bank lender, who won’t close until repairs are done following an appraisal.
I have applied with a private lender who won’t lend until they know the repairs…

BUT I CAN’T GET IN TO THE HOUSE!

I have to bid sight unseen! How can I get financing? I can bid and put down an earnest money deposit but I can’t come out of pocket for repairs, etc.
Plus, how do I evict people when I don’t own the house, if I win the bid, and can’t assess repairs until they are out, how do I get them out if I haven’t closed on financing, and I can’t get financing until I can get them out and assess repairs? round and round…

Any advice would be helpful. Basically you have to have 6 figures in cash to play at these auctions…

Response:

Over all the years, all the houses, and all the investors I know, buying at foreclosure auction is one of the worst possible ways to buy. There are a number of reasons including the ones you mentioned:

  • You can’t get into the house to assess what needs to be done because the bank doesn’t own it yet.
  • You have to work with a bank (the worst) and the rules are constantly changing and never in your favor.
  • Don’t buy anything with a tenant in it if you can avoid it. When a house is foreclosed, the owners are typically furious and want to take it out on the bank, so they often destroy the property. That doesn’t ultimately hurt the bank, just the buyer. We bought one where the foreclosed owners had poured sand down all the drains. No way to know that ahead of time.
  • Upset-bid periods
  • Most foreclosed properties sell full retail at auction.
  • By the time they get to auction, the good ones are picked over
  • There’s a very real reason banks don’t want to loan for you to purchase these…

So, my advice to you is to attend all the local investor meetings you can to find properties to purchase better ways than these auctions. If a house is a decent price in a decent area, we find that end use buyers bid them up to retail, anyway. And, once your bid is approved, there is a 10 day “upset-bid” period where anyone else can come and bid higher.

There is nothing good about foreclosure auctions. How to do them? Don’t. You’re far better off letting it foreclose and then buying from the listing real estate agent once you can go through it.

What can you add? What’s been your experience with bank foreclosures?

By Lela

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