Home Buying & Selling The 5 Biggest Risks of Buying Foreclosures at Auction

The 5 Biggest Risks of Buying Foreclosures at Auction

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Home construction was a dying business after the collapse of homes in 2008. My partner and I needed to replace it with a new source of income. In our experience, flipping a foreclosure seemed like a relatively easy way to make money. Given how quickly the value of the house went down, we thought we could quickly jump in and land some big deals.

We had the wrong idea.

After searching for foreclosure properties in MLS for several weeks and writing hundreds In the offer, we have not yet purchased a single foreclosure. We were beginning to feel that foreclosure was a waste of time.

Finally, thanks to the partner’s discovery of foreclosure Was not Posted on MLS, we realized what we were looking for terrible A place for foreclosure transactions. We were competing with countless buyers when the actual deal was closed very early in the auction process.

Only properties that for some reason did not sell at the auction will change to the REO foreclosure list. If a bidder buys a foreclosure on the stairs of a courthouse, the property will not hit MLS, at least until the buyer is ready to resell it.

Eventually, I bought the foreclosure that my partner found on the day it was auctioned. After that, I bought some more. We sold these properties for great profit and built a new business based on these successes.

The process now looks simple, but in retrospect it definitely didn’t feel like that at the time. It was confusing, and I was always worried that we were the only costly mistake away from failure.

Related: How to successfully market to a pre-foreclosure home

Risk of buying foreclosure at auction

If you are new investor or unfamiliar with foreclosure, it is important to remember to buy real estate at auction teeth It’s risky.Things can go wrong, and when they do, they can cost you big..

But that doesn’t mean you shouldn’t pursue foreclosure flips as an investment strategy. What I’m saying is that you should know what you’re doing first.

The best way to mitigate risk with a foreclosure purchase is to defer the purchase until you really understand the process. In our next book, Bid to buyDetails of the foreclosure process When Pit that should be avoided when bidding on bad properties.

The following highlights the five greatest risks associated with buying foreclosures at auction and provides ways to mitigate these risks based on over 10 years of experience and over 700 successful foreclosure flips. increase.

Risk # 1: List accuracy

Auction notices are usually printed on paper and posted at the courthouse. While this low-tech approach to auctioning foreclosures is slowly improving, most bidders still get information about their property from the foreclosure list service. In most cases, the companies that provide these services collect printed data, digitize it, and then resell the information.

The problem with this is that the process of digitizing property information is prone to human error. Prices may not be accurate. The address may be incorrect.It’s because I know the person who bought the wrong property due to the inaccuracy of the list important Scrub property information for mistakes Previous Bid at auction.

Related: How to Buy Foreclosure: A Guide to Finding and Landing Foreclosure Transactions

Risk # 2: Asset status

When buying a home at an auction, it is impossible to know the true condition of the property. Unlike selling REOs, you don’t have the opportunity to walk or inspect your home. In addition, it’s not uncommon for owners to dump their place in the trash after default, so properties purchased at auction can always require serious work.

There is no way to know the actual condition of the property you bid on, so setting the price of the property will mitigate this risk. May Needed for your calculations. By doing this, you don’t have to worry too much about overpaying where you might need tens of thousands of dollars of work before you’re ready to resell.

Risk # 3: Occupation

The property sold at the auction may still be occupied. If you want to buy an occupied property, you must evict the occupant before proceeding.Depending on state law and other factors, this is true Slow things down. The former owner can even file a proceeding against the lender.When this happens, the house can be tied up for Year..

Buying foreclosures with a resident has potential benefits, but a lower risk approach is to buy an unoccupied property. Drive-by inspection is required to determine occupancy relatively accurately.

In keeping the concept of couples, gavels and online auctions on laptops

When you’re in the property, look for obvious signs of occupancy, like a driveway car. Knock on the door or talk to your neighbor for further assurance. Another trick is to turn on the outdoor faucet to determine if the water is blocked.

There is always the possibility that someone lives in the property, even if there are no signs of occupancy.Still, drive-by-process (details Bid to buy), You can accurately judge the occupancy rate with a probability of about 90%.

Risk # 4: Clarify the title

Remember in the first half of the article that you needed to postpone the purchase of a property at an auction until you understood the foreclosure process? The reasons are as follows: This is not always a simple process with a single mortgage overpayment.In other words, there can There are multiple liens at home.

Some liens will be extinguished by foreclosure, while others will have to be paid by the new owner. Buying real estate at auction without looking at the title or financial history can result in unpaid property taxes, junior lien, and other unexpected charges. everytime Thoroughly review the property titles before bidding to avoid annoying (ie expensive) surprises.

Risk # 5: Rating

Too much bidding for foreclosures due to inaccurate valuations is one of the most common mistakes new investors make in auctions. However, it is difficult to accurately estimate the value in the same way that it is used for MLS listings, as you never know the true state of the property offered at the auction.

Fortunately, there are ways to avoid overpayment of foreclosures without knowing the condition.

In the next article, I’ll elaborate on the tools and strategies used to make informed guesses about the value of foreclosures sold at auctions.It ’s impossible to know, Exactly It’s definitely feasible to bid on a particular property or get close enough to secure profitability by reselling.

Bid to Buy: Step-by-Step Guide to Investing in Real Estate Foreclosure By David Osborn and Aaron Amcastegi Bigger Pockets Bookstore..

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Do you have questions about the risks associated with buying foreclosures at auction?

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