Foreclosure Sale Risks and Auction Risks
Buying real estate at trustee sales, sheriff's sales and foreclosure
auctions can be extremely profitable for real estate investors, but
involves serious risks, especially in comparison to buying real estate in
a normal escrow transaction. Bidding on a property at a foreclosure sale
usually requires an all cash bid, by cashiers check which must be paid in
full at the end of the auction. There are minimal if any assurances or
guarantees made to the bidder. Proper due diligence is mandatory, prior to
bidding at a foreclosure sale or sheriff's sale auction.
- Title Risks - before bidding at an auction, the title should be
carefully examined, since you will not get a title policy or any
assurance of clean marketable title for the property. This is a
serious risk as there may be
many liens on the property, back property taxes, judgments, lis pendens,
etc. It is possible to buy a title policy prior to the auction,
but if the sale is postponed, cancelled or you are not the winner, this
expense may be wasted.
- Eviction - Once you purchase the property, if not vacant, you
may have to evict tenants or squatters from the property. This process
may take months, require the help of an attorney and be problematic for
the amateur to do yourself.
- Inspection - Thoroughly inspecting the property prior to the
sale is not usually possible, thus the property may have a cracked slab,
termite damage, water damage, mold or other expensive surprises or
damage left by the previous tenant / owner, once you gain access to the
- Overpaying - Many bidders get caught up in the auction
frenzy, overbidding fair market value for the property. Determine
a maximum bid prior to the sale and stick to it, regardless of competing
bidders. Make an accurate estimate of the value of the property given
the unknown risks.
- Zoning Violations / Building Violations - these can be
expensive if not identified, sometimes requiring the purchaser to
teardown part or all of a building, or expensive modifications.
- Environmental Hazards - toxic waste, dumped chemicals, and buried gas tanks can be
very expensive to fix.
- Competing Bidders - auctions usually bring professional
investors who have deep pockets and very good due diligence and data
services. The small time investor should watch out for these guys,
and be secretive of information on properties you intend to bid on both
before and at the auction.
- The sale may be reversed - a trustee sale may be
reversed by the trustee after the sale occurs, this is usually done
within a few days, if there is a problem with the way the trustee sale
was conducted, improper noticing, or if the trustee held the sale not
knowing the property owner had filed a bankruptcy. The trustee
will return the high bidders money and the sale will usually be
- Loosing your deposit - in some states/counties bidders are
only required to deliver a deposit at the time of the auction, and then
deliver the remainder of the purchase price within a matter of hours /
days after the sale, However if you can't / don't deliver the remainder,
the deposit is usually lost.
- Right of Redemption - after a sale, the previous owner or in
some cases, government agencies (for example IRS tax liens) have the
option of buying the property back from you. Check your state laws
With all these risks, your maximum bid for a foreclosure auction, should
be well below what you would pay for the same property, if you had a
normal home sale transaction with escrow, sale contingencies, title
insurance and the opportunity to properly inspect it before purchase.
Sheriff's sales, trustee sales, foreclosure sales, and real estate
auctions in general require more stringent due diligence by the real
estate investor, prior to bidding to minimize these risks.
Foreclosure Resources and Foreclosure Links:
Foreclosure Process and Foreclosure
Laws - Steps of Foreclosure for all 50 states
Auction Companies - foreclosure trustees and auctioneers list
Real Estate and REO Property Investment Resources
Real Estate Articles and Investing Resources
Bank Owned Homes by
Lender Directory - a free directory of bank REO homes for all major
Buying REO property for Real Estate Investors -REO property investment
Disclaimer, I am not an attorney, laws vary
from state to state and change constantly, this information should not be
relied upon as legal advice. If you have additions or comments please
direct them to
The Hard Money Pros
Private and Hard Money Lenders in California
PO Box 91472, San Diego, CA 92169
©Copyright 2006 JMAC Funding
Licensed by the California Department of Real Estate, DRE# 01440161