When the kids and I were out for pizza the other night, I was approached by a young guy named Justin. He’d read a piece I recently wrote about how to invest in real estate at a young age and asked if we could meet sometime to talk more about finding good deals as a new investor. He was clearly passionate about real estate and eager to get started—a lot like me back in the day. But, he also seemed fairly convinced that he could build his business quickly by buying foreclosure auction homes and flipping them. I agreed with him that he might find distressed homes priced below market value at an auction, but I know that they aren’t always worth the hassle. Wanting him to consider the risks of foreclosure auctions before he got too excited about attending them, I invited him to pull up a chair. I had plenty of pizza—and knowledge—to go around.
Are Foreclosure Auctions Worth the Risk?
Most markets across the U.S. have experienced a significant drop in foreclosure activity since the housing bubble burst more than ten years ago. Bank repossessions are down, but so are foreclosure filings and default notices. Additionally, according to ATTOM Data Solutions, only one in over 2,000 homes with a foreclosure filing actually gets foreclosed on. By all accounts, many homeowners are meeting their mortgage obligations, even if it’s at the eleventh hour.
Not every housing market is faring so well, however. Ninety-nine metro areas out of the almost 220 that ATTOM Data Solutions analyzed are seeing an uptick in foreclosure activity. Fifteen states, including California, New York, and New Jersey, posted year-over-year increases in foreclosure filings alone. So, it appears that homeowners in some areas, at least, are bucking the national trend and having trouble paying their loans. If you buy, renovate, and sell houses in one of these areas, that could mean more distressed properties will soon be coming down the foreclosure pipeline and, potentially, into your portfolio—if you know how to get them.
For many real estate investors, especially less experienced ones, grabbing a good deal from the foreclosure pipeline means taking a chance at buying property from an auction, like the foreclosure auction in Brooklyn. But, because of the risks inherent in purchasing a home from an auction, it’s not always worth it. If you are a new investor, like Justin, consider the following:
- Competition is stiff. Real estate investors looking for a great investment property flock to foreclosure auctions because they know—or, at least, they suspect—that that’s where they can find the cheapest deals. But, because so many show up to buy, the bidding can reach numbers that leave little room for realizing reasonable returns. That can be hard to see if you get caught up in bidding just to beat out the competition. Sure, you may end up winning the property, but the cost of doing so may not make good financial sense if you pay more than you intended—if you even win at all.
- Inspections aren’t always possible. Conducting a home inspection prior to bidding on a property is not always possible. Sometimes, it’s even forbidden. Since foreclosed homes tend to start out in poor shape, and can quickly deteriorate the longer they stand vacant and neglected, it’s critical that you get your eyes on the property so that you can wrap your head around some numbers. Not knowing how much work you have to do on a house puts you at a serious disadvantage when it comes to determining your purchase price and your rehab budget. What looks like a good deal on paper may actually be a money pit in real life. And, you won’t find out until the property becomes yours.
- There are strict terms of sale. The terms of sale for almost all foreclosure auctions are both rigid and non-negotiable, and a failure to abide by them usually results in stiff penalties. For example, large deposits are required—sometimes as much 25%—in the form of cash or a cash-equivalent, like a cashier’s check, to be paid at the time of registration. If you win the bid, the balance is often due within just a few days; for some foreclosure auctions, like those held at the Cook County Judicial Sales Corporation in Chicago, the balance is due the following day. If you don’t pay on time, the court can hold you liable for damages in addition to keeping your deposit.
- Winning does not equal possession. For the vast majority of foreclosure auctions, court approval of the sale is required before you can take possession. So, after you’ve paid for the property in full, you have to wait. You aren’t granted a deed, you may not be given access to the property, and you certainly can’t begin renovations. And, depending on which county the auction is held in, the approval process can take months. Even then, some states, like New Jersey, allow the previous owner to redeem the property while you’re waiting on the court to make a decision—which makes taking ownership of auction homes all the more dicey.
- Your total costs to own add up. If and when the court approves the sale and you’re able to take possession of the house, you won’t be out of the woods just yet. Not only could you be faced with repairing a major fixer when you paid for a minor one, you might also have to contend with a host of surprise expenses that can thwart your expected returns. Rarely, if ever, do foreclosed properties come with clear titles. That means, if there are tax liens, encroachment issues, deed restrictions, or any other encumbrances attached to the property, they become yours to remediate. The same is true of tenants or squatters who refuse to leave—and you have to pay to evict. Any one of these issues can take a bite out of your potential profits when you’re finally able to renovate and sell your investment property. But, a combination of two or more can eat away at more than you can afford to lose.
Considering the hassle of buying an investment house from an auction—or even just attempting to buy one—you’ll be much better off if you skip foreclosure auctions altogether. There are simply easier, and less risky, ways of building your property portfolio quickly—no matter what your local market looks like. Foreclosure activity ebbs and flows, and it’s not necessarily indicative of how many homeowners are under current financial duress. And, if you can find distressed homeowners who need to sell fast because they are in an “ugly” situation, you stand a good chance of getting a great deal and helping them out at the same time.
Deals That Benefit Your Bottom Line and Distressed Homeowners
Luckily, it didn’t take long for me to convince Justin that looking for investment deals at foreclosure auctions wasn’t worth the risk. Unfortunately, I had to learn the hard way. Years ago, before I became an independently owned and operated HomeVestors® franchisee, I bid on an auction home, followed the terms of sale, paid for the house in full, and waited. It took months to get court approval and, by the time I did, squatters had moved in and turned my minor fixer into a major financial drain. The extensive repairs I had to perform pushed my budget to the limit. I ended up selling before I even finished the rehab just to keep it from burying my bottom line even further.
After that experience, however, that I joined the “We Buy Ugly Houses®” team. Knowing there had to be a better way to find good deals, I started asking around—just like Justin. When a more seasoned investor told me about being a HomeVestors® franchisee and how I could get access to distressed homeowners before their homes ended up on the auction block, I couldn’t wait to sign up. I never wanted to hassle with an auction home again. And, thanks to HomeVestors’ proprietary marketing tools and resources that now drive motivated sellers to me, I never have to.
The investment deals you’re looking for are looking for you. Contact HomeVestors today to get the leads you need to build your business and help homeowners in distress.
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