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 inside.
• 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 rescheduled.
• 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 regarding this.

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

Foreclosure 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 lenders

Article: Buying REO property for Real Estate Investors -REO property investment tips

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 comments.