Foreclosure auctions are not for the inexperienced fix-and-flip investor, or for the timid, but for a flipper who has a great eye for a good deal, who can stand shoulder-to-shoulder competing with other highly motivated bidders, these sales offer the possibility of purchasing distressed real estate significantly below market retail. Foreclosure auctions are held either in person (usually at the county courthouse) or online at auction sites like auction.com where you can save thousands on closing and transaction costs compared to traditional broker-assisted real estate purchases.
Evaluate As-Is Condition and After-Repair Value
It is critical to understand that at a foreclosure auction the property will be sold as-is, and it may also be occupied, so if you have an opportunity to drive by and evaluate its condition and occupancy beforehand, you definitely should. Research similar properties in the area that have sold in the last 3-6 months and take note of the surrounding neighborhood, so you will have a clearer understanding of the property’s potential value after it is improved. Your estimate of the as-is condition and the after-repair value will determine the maximum amount you can bid at the foreclosure auction and still earn your target ROI on the project.
Run Title on the Property
Before the sale, be sure to run title using a certified title examiner to verify if there are any encumbrances. Remember that while many title encumbrances are released prior to auction, some liens, such as Federal IRS liens, may remain on title and can cost you thousands of dollars. You should also carefully review any available disclosures that may significantly impact value, such as asbestos or lead issues. All of these details will help you determine the maximum amount you can bid on auction day.
Set a Maximum Bid Price
You may have heard the term “auction fever” used to describe what can happen when bidders get so caught up in the competition and the emotions involved in wanting to win, they bid more than the property is actually worth. For a fix-and-flip investor, this “fever” can lead to ownership of a distressed property that won’t return much of a profit—and can even result in a negative ROI.
To guard against auction fever, be sure to have your absolute maximum bid in mind prior to the start of the auction. When emotions run high, and other bidders are pushing the property’s price past your maximum, don’t hesitate to walk away knowing your target ROI is more important that a winning bid.
Have Your Fix-and-Flip Funding in Place
Be aware that there may be a set reserve (a minimum price that must be reached for the auction to proceed), but there are also auctions where, regardless of the final price, the highest bidder wins. Be prepared to pay a deposit up front (in order to join in the bidding), and be aware that each state has its own rules regarding the specifics of final payment. Most foreclosure auctions require payment in cash (or cashier’s check) within a relatively short time of winning the auction. Technically, it doesn’t matter if the funds come from you or a lender. What does matter is that the successful bidder has the financial ability to close the deal on time.
Some fix-and-flip lenders have “close as cash” lending programs where pre-approved borrowers can finance fix-and-flip auction purchases in real time, with a fee charged to the borrower to cover the lender’s exposure while the Note and Deed of Trust are finalized.
For more information about purchasing properties at auction, and many other “off list” ways to find discounted investment properties, download our free guide, “Finding Lucrative Real Estate Investment Deals in Competitive Markets.”
Want to talk to an Anchor account executive about how we can help our borrowers compete with cash bidders at auctions? Contact us today.