From an investor’s point of view, foreclosure properties represent extremely profitable opportunities. They allow you to obtain real estate at affordable prices, but you must be willing to jump through some hoops and overcome some hurdles.
One option is to go through a foreclosure auction. However, the mere mention of a “foreclosure auction” is enough to send many people scrambling. This is good news for you. It means you can zero in on a profitable real estate investment niche by simply being willing to educate yourself about the process. Specifically, you’ll want to make sure you understand the following:
Let’s start by being very clear about one thing: foreclosure auctions come with a high amount of risk. On the flip side, the also come with a healthy amount of potential and reward. This automatically rules out “cautious” or “safe” people. You must be willing to take on a bit of risk when you pursue this investment avenue.
The reason is that auctions can be full of snags. Even seasoned bidders sometimes strike out when they think they’ve found a strong property. This is because prospective buyers can’t inspect the home to determine if there’s damage. Even more limiting is the fact that you can’t find out if there are any senior liens on the property, such as outstanding taxes owed.
In other words, expenses can sometimes add up for foreclosed properties. What you thought was a fantastic deal could suddenly have you underwater in no-time. We say all this to be transparent about foreclosure auctions. They definitely aren’t for everyone! But, as you’ll see in this article, there’s enough upside to seriously consider them. Just make sure you know what you’re getting into.
It can help to understand how foreclosed homes end up in auction. This allows you to see the total picture and comprehend what’s happening at each stage of the process. Essentially, an auction is a publicly held trustee sale where public buyers are allowed to bid on real estate. Properties are listed at these auctions when a homeowner is in default of a mortgage payment for more than 60 days.
When a homeowner defaults on loan payments, the bank will send multiple “notice of default” letters. If the owner fails to satisfy the delinquent payments, or work out a payment program in accordance with the lender’s stipulations, then the bank sends out a final letter that says the property will be put up for sale in 21 days.
After the lender takes possession of the property, it will try to recoup the outstanding loan balance and then appoint a trustee to handle the repossession and auction process. Buyers are required to take immediate possession of the property so that the delinquent owner has limited options.
If you’re a serious buyer, you’ll need to come to the auction with your finances already figured out. In many cases, foreclosure auctions will require you to have a cash payment in hand. They may even verify funds before you’re even allowed to bid. In other situations, proof of financing may be enough to be considered a serious bidder.
It’s never wise to show up to an auction without any plan for financing. It’s very unlikely that a seller is going to work with you if you don’t have loan approval. That’s a risk they simply won’t be willing to take on. Additionally, don’t expect the bank selling the property to provide you with financing. They’re trying to get rid of the property, not extend the loan.
Because the original homeowner stills owns the property until the title changes hands, you can’t visit the property and walk around. That means you have to get creative with your pre-purchase homework. Research public records, check online listings, and drive by the property to get a feel for the neighborhood.
What does the lawn look like? You can tell a lot about a home’s interior by studying the curb appeal. If the homeowner pays attention to landscaping, they likely care for the interior of the home as well. If you’re really scrupulous, you may even try talking with neighbors to see if they know anything.
It’s always wise to make a practice run before seriously considering buying a property at an auction. By simply attending an auction, you can spend your time studying the process. With no worries about when to bid, how much to bid, and other considerations, you can spend the entire time soaking in different aspects of the auction. This will help you in the long run.
One of the biggest mistakes investors make at their first auction is letting emotions drive bidding behaviors. If you want to avoid getting caught up in the excitement of the moment, you need a plan.
Come to an auction with a final number in mind. Regardless of what happens, you must be willing to stop at this number. Never go a penny over. This discipline will save you from overbidding simply because there’s a lot of activity and perceived demand. Remember, there’s always another property waiting.
First-time auction buyers shouldn’t go into the process alone. You need to have some experienced people surrounding you. Depending on your situation, this may look like an experienced investor, a real estate agent, or a trusted advisor. The knowledge they provide you will be invaluable.
The Houston real estate market is very fluid. Rates change, property values fluctuate, rents increase, and foreclosures come and go. If you’re interested in becoming a real estate investor in this market, you need to surround yourself with experienced professionals who understand the ins and outs of the area.
At Green Residential, we have over 30 years of experience in Houston property management and would love to help you achieve your dreams of becoming a successful investor with steady monthly cash flow. From tenant screening and property marketing to contract drafting and rent collection, we do it all. Contact us today for more information!
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