Buying Property at a Foreclosure Auction

Television ads tout the benefits of buying a home at auction in foreclosure. In some cases, advertisers target people desperate to own their own home. In others, the ads are aimed at investors. Many get-rich-quick infomercials center around how buyers can get a foreclosed property cheap, then turn around and sell it for much more money.

It all sounds very simple, cheap and easy. Keep in mind that when it comes to buying property at auction, it falls entirely upon the buyer to do his homework. More so than with other purchases, homes bought at foreclosure auction fall into the category of caveat emptor, or buyer beware.

If there were that much money to be made, people would not open up their treasure chests to complete strangers. They'd make, and keep, the money for themselves.

Here are a few things to consider before trying to buy property at auction:

You Buy It, You Own It. This sounds redundant, but people often misunderstand how financing a foreclosure works. Before you bid on a property at a foreclosure auction, make sure you will be able to finance the deal. If you plan to borrow from a bank, get prequalified and discuss that you may buy at foreclosure with the lender.

If you bid on a property at auction and win, you are liable for the money, even if you are turned down for financing and you cannot afford the property. Everything falls on the buyer in terms of making sure the money is in place. You may have to rely on money on hand as opposed to financing from a bank.

If you can't finance the deal, the property will most likely go back to auction. You will lose the deposit you made on the property, and if the property sells for less the second time around, you may be liable for the difference between the first and second sales price.

Information is Powerful. If you are interested in buying a foreclosed property, you can (and should) do a lot of information gathering. Get to the department of land records and find out what the house last sold for and when to get an idea what may be owed on it in terms of a mortgage. Check land records to see if the property has other liens on it.

Know the specifics of the sale. While there are generalities, and every state has strict laws to govern foreclosure sales, you'll find variables based on the attorney and auction house handling the sale. You will want to get a copy of the newspaper advertisement regarding the specific sale. You may be able to gather a lot of financial information from the ad such as how much money you should show up with and in what form.

If you don't understand any part of the ad, or if you are left with questions, particularly if it deals with money, you must call the attorney and clear it up before you bid. For example, without research, you may think you can write a personal check for the deposit amount at the sale. The attorney may have it listed in the ad that he accepts Certified Checks or Money Orders. You won't be the exception to their policy. If you have questions on the legalities, you have to get the answer from the attorney handling the sale. The auctioneer can give you general information on the sale, but only an attorney can speak to legal questions.

Keep Your Eyes Open. In addition to the information you gather on paper, you need to do a first-hand look at the property. A home is being foreclosed upon because someone is not paying the mortgage, generally. If someone can't afford to pay his mortgage and it's gotten to the point that the bank has foreclosed, the odds are the homeowner has not been maintaining the property. Even though you may see it valued at a certain amount on paper in your research, your eye view of the property may tell you that it is not worth as much as the owner originally paid for it.

The bank that loaned the money on the property being foreclosed on wants to make its money back, and will want to get what is owed on the property, at the least. Your physical research may tell you that if you pay that amount now, given the property has been devalued through neglect, you will be overpaying. You may not be able to get the necessary funding to pay for the property, and if you are buying the property as an investment, you may be paying more than you should for the property.

Before you buy any property at foreclosure auction, do a lot of research. Ignorance of the facts may end costing you a lot of money.