6 Challenges You Face When Buying A Home At A Foreclosure Auction
I an article By: Marcia Jedd Published: May 18, 2011 "Buying a House at Foreclosure Auction is Risky Business" she talks about the challenges you face when trying to buy a foreclosure at auction.
Here are 6 challenges you may face along with some solutions from the article "Buying A house at Foreclosure Is Risky Business"
Although foreclosure auctions follow local rules, there are some universal challenges you’ll face no matter where you shop for foreclosed properties. Here’s how to solve them. Solutions to 6 common foreclosure auction challenges
1. Challenge: Getting reliable information about foreclosure sales.
Solution: Most foreclosure sales are still announced in local newspapers. And you can get accurate information about buying foreclosures from reliable book publishers:
2. Challenge: You can’t get inside the property before the auction to inspect it for structural problems and repairs.
Solution: Walk around the home to check its exterior condition. If it’s vacant, look through the windows. Ask the neighbors what they know about the property.
You can safely assume there’s something wrong with any house sold at a foreclosure auction, so cover yourself by bidding no more than 70% of the home's market value.
3. Challenge: You need to figure out the market value of the house to prepare your bid. Some foreclosure auction announcements include information about the size of the original mortgage. That’s not how much the house is worth or even what the owners owe now.
Solution: Commission your real estate agent to do a broker’s price opinion (BPO) on the home you want to bid on. The BPO will show you comparable sales, telling you what similar, nearby homes that weren’t foreclosure sales have recently sold for.
4. Challenge: You don’t know if there are liens on the home. Some auctions don’t give you clean title to the property, meaning liens from the federal government or other entities may not be removed during the foreclosure auction process. You’d have to pay off those liens if you won the property.
Solution: Focus your efforts on two or three homes in desirable locations. To find out about any liens, pay a real estate attorney to run a title search on each property and issue a commitment to insure the title after purchase. Ask how the policy treats liens filed between the time of the search and the time you close.
5. Challenge: You have to pay cash and pay it quickly. Most auctions require bidders to come up with the full purchase price in cash within 30 days.
Solution: Don’t count on getting a mortgage that fast. Look for other sources of cash that make financial sense for you.
* Take out a home equity line of credit or do a cash-out refinance.
* Tap retirement accounts, provided it makes sense for you from a tax perspective.
* Work with other investors to fund a partnership to invest in foreclosed homes.
6. Challenge: You’re in love with a house that you’re aware is headed to foreclosure, but you’re afraid to bid on it at the foreclosure auction because you know nothing about the process.
Solution #1: Contact the owners and offer to purchase the home as a short sale. That’s where the bank agrees to let the owners sell for less than what they owe on the mortgage.
Solution #2: You may be able to buy the house after the foreclosure sale. Foreclosure sales are run by a government agency (often the sheriff), which collects the money from the highest bidder and gives it to the bank to pay off the mortgage.
Be aware that Banks will often bid at the sale to make sure someone doesn’t pay less than the house is worth (translation: not giving the bank enough money to satisfy the mortgage).
If the bank is the high bidder, it’ll take title to the house and put it up for sale. Then, buying the home is just like buying any other house. You can buy an owner’s title insurance policy so you know the house is free of liens; you can get a home inspection to check for needed repairs; and you’ll have plenty of time to line up your financing.
A real estate agent can alert you the day the bank puts the home on the market, so you can submit your purchase offer.
Since the bank pays the real estate agent’s fees, you likely won’t pay more than you'd have bid at the foreclosure auction to outbid the bank, and you’ll avoid most of the risks and unknowns of buying at the auction.
Marcia Jedd, who covers a range of home and real estate issues, dreams of stumbling upon a foreclosure sale where a vacation lake cabin in northern Minnesota is being sold free and clear at a deep discount. Her bylines include many local and national publications, including FrontDoor.com, HGTVPro.com, Kitchen & Bath Ideas, and Professional Builder.