What Makes Buying a Foreclosed Property Risky?

You can buy a home at a significant discount at a foreclosure auction, but you’ll face a host of challenges. Don’t get burned; be solutions-ready.

buying a home in foreclosure at auction is risky for sale sign on yard of white house
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If you want to get a good deal at a foreclosure auction, know what you’re buying and how you’ll be expected to pay for it.

Start by understanding the foreclosure auction rules for your area. State and local governments set their own rules for such factors as:

  • Bidding process 
  • Deposit amount  
  • Auction location  
  • Possibility of homeowners getting their properties back after the sale

You can learn about the process in your area by talking to officials at your county tax department or to a REALTOR®.

Although foreclosure auctions follow local rules, some challenges for foreclosed properties are universal.

What's Wrong With Buying a Foreclosed Home?

First, there's a serious possibility you'll have to renovate or work on these homes for a long time before they're livable. Second, because foreclosed homes can be good deals, you may have a lot of competition when bidding on a home at auction.

Here's more about the risks and solutions related to those and other issues in buying a foreclosed house. 

Foreclosure Auction Risk No. 1: Getting Reliable Sales Information

Challenge: Getting reliable information about foreclosure sales. Many companies charge fees to send you lists of foreclosures that may not be current. Or they sell expensive foreclosure-buying “systems” that promise to teach you how to make millions in real estate.

Solution: Most foreclosure sales are still announced in local newspapers. And you can get accurate information about buying foreclosures from books such as "Foreclosure Investing For Dummies" (second edition, 2022). 

Foreclosure Auction Risk No. 2: You Can't Inspect the Property

Challenge: You can’t get inside the property before the auction to inspect it for structural problems and repairs. Many foreclosure auction properties are in bad shape because the owners couldn’t afford the upkeep. And sometimes angry homeowners purposely damage the property to punish the foreclosing lender.

Solution: Walk around the home to check its exterior condition. If it’s vacant, look through the windows. Ask the neighbors what they know about the property. If it was a rental, check the inspection records on file with the local government.

Foreclosure Auction Risk No. 3: Unclear Market Value

Challenge: You need to figure out the market value of the house to prepare your bid. Some foreclosure auction announcements include information about the size of the original mortgage. That’s not how much the house is worth or even what the owners owe now. If the current owners bought at the top of the market, their mortgage may be more than the home is worth in today’s market, and they could owe even more if there’s a second mortgage on the house.

Solution: Commission your real estate agent to do a broker’s price opinion (BPO) on the home you want to bid on. The BPO will show comparable sales, telling you how much similar, nearby homes that weren’t foreclosure sales have recently sold for.

Bid well below those comparable sales to leave yourself room to pay for repairs and unexpected problems. Ask the agency that runs the auction how to find winning bid amounts from recent auctions. Use that information to guide your current bid, too. A look at local tax and assessment records will tell you more about previous and current auction properties, like square footage and lot size.

Foreclosure Auction Risk No. 4: Paying Off Liens on the Home

Challenge: You don’t know if there are liens on the home. Some auctions don’t give you clean title to the property, meaning liens from the federal government or other entities may not be removed during the foreclosure auction process. You’d have to pay off those liens if you won the property. 

Solution: Focus your efforts on two or three homes in desirable locations. To find out about any liens, pay a real estate attorney to run a title search on each property and issue a commitment to insure the title after purchase. Ask how the policy treats liens filed between the time of the search and the time you close.

A less-expensive option: Hire an independent title search professional called an abstracter or an online company. Title insurance costs vary by state.

Foreclosure Auction Risk No. 5: Paying in Cash

Challenge: Usually you can’t use a mortgage to finance the purchase, so you'll have to be prepared with cash in order to bid, according to BankRate. That means you’ll have to show you have payment before you can even participate in the auction. If your bid wins, you’ll have to finish the paperwork and pay for the property immediately or within 24 hours.

Solution: Have your cash ready early, even though you won't know the amount of competitive bids until auction day. Most auctioneers take payment from verified funding sources like cashier’s checks, BankRate says. If you pay excess funds to the auctioneer, the excess is generally returned to you within two to six weeks.

Foreclosure Risk No. 6: Unfamiliarity With the Process

Challenge: You’re in love with a house that you’re aware is headed to foreclosure. But you’re afraid to bid on it at the foreclosure auction because you know nothing about the process.

Solution #1: Contact the owners and offer to purchase the home as a short sale. That’s where the bank agrees to let the owners sell for less than what they owe on the mortgage.

Solution #2: You may be able to buy the house after the foreclosure sale. Foreclosure sales are run by a government agency (often the sheriff), which collects the money from the highest bidder and gives it to the bank to pay off the mortgage.

Banks will often bid at the sale to make sure someone doesn’t pay less than the house is worth (translation: not giving the bank enough money to satisfy the mortgage). 

If the bank is the high bidder, it’ll take title to the house and put it up for sale. Then, buying the home is just like buying any other house. You can buy an owner’s title insurance policy so you know the house is free of liens; you can get a home inspection to check for needed repairs; and you’ll have plenty of time to line up your financing. 

A real estate agent can alert you the day the bank puts the home on the market, so you can submit your purchase offer.

Since the bank pays the real estate agent’s fees, you likely won’t pay more than you'd have bid at the foreclosure auction to outbid the bank, and you’ll avoid most of the risks and unknowns of buying at the auction.

Are the Risks of Buying a Foreclosed Home Worth It?

Only you can assess whether you should purchase at a foreclosure auction. Several financial risks are involved, and you may have to spend a good amount of time negotiating and laboring. 

But if you can deal with the obstacles involved in purchasing one of these homes and you have the time, expertise, and resources to make it worth your while, you could end up with a great deal. 

More from HouseLogic

How to Assess the Real Cost of a Fixer-Upper House

6 Tips for Buying a Home in Short Sale

Foreclosure Resource Guide

Other web resources

Auction Guides: Not so Hot Properties

Marcia Jedd

Marcia Jedd enjoys the variety of holiday decorations in her Minneapolis neighborhood. Her bylines include FrontDoor.com, HGTVPro.com, Professional Builder, Kitchen & Bath Ideas as well as Garden, Deck & Landscape magazines.