Judicial foreclosure auctions
- Auctions often require a 5 – 10 percent deposit before you can bid.
- Once you win, you need to pay in full, typically within 24 hours. Which means, of course, there’s no time to get a mortgage. And if you don’t show up with the money? Kiss your deposit goodbye.
- It’s often impossible to do more than a drive-by inspection. Many homes sold at foreclosure auctions are still occupied, so there’s no opportunity to even see the inside, much less do a thorough inspection of the roof, foundation, heating and air conditioning, etc.
- Depending on the state where the auction is held, you may face hidden mortgages or liens. You can read about how one woman almost paid $14,000 for a foreclosure property that came with an outstanding $140,000 bill in our story How NOT to Buy a Foreclosure. You can avoid this by paying $50-200 for a title search on the property before you bid, but that’s more money up front with no guarantee of winning the house.
- The competition for these houses is often fierce. You could be bidding against well-heeled investors with a lot more time, expertise, and cash than you’re bringing to the table.
Real estate owned properties (REOs)
- Learn to spot a deal when you see one. Buying a home cheap means knowing what “cheap” is. When a below-market REO comes on the market, you’re going to have to make a snap decision. So learn values beforehand and find an agent that’s plugged in to the REO market that can help.
- Be pre-approved for a loan. Be ready to pay for a bargain when you find one. That means having financing pre-approved. See our story Follow These 3 Steps to Save Thousands on Your Next Mortgage.
- Be ready to pounce. “If it’s new on the market, it’s not something you can look at on Friday, sleep on it, and think about making an offer on Monday,” says Grimes. “By then, there will be several offers and it’s a bidding war.” If you think you’ve found a bargain, Grimes suggests putting in an offer immediately because “it’s important to control the property before worrying about the details.” If the bank accepts your offer that includes a clause making it contingent on an inspection, you’ve “locked up” the property without being on the hook. Grimes says, “Once you get it locked up, you can go through due diligence and if you think you overpaid you can back away.”
- Bid as high as you’re willing to go. The rules for buying an REO are nearly opposite those for buying a home the traditional way. Grimes says, “It’s not about how much under asking price you should offer, it’s really how much over asking price you should offer,” because the competition for bargain homes is fierce. How high do you need to go? “I was working with a buyer last week. We went 10 percent over asking price and thought we were good, but we were outbid,” says Grimes. “The bottom line is the buyer has to make their strongest offer first.”