6 rules for buying foreclosures online
Foreclosure auctions are making it easier to buy distressed real estate online. The homes vary widely in price and condition, but sticking to these ground rules can help you land an amazing deal.
First you could use the Web to buy books. Now your computer's "return" key has become your bidding paddle for real-estate auctions, too.
An increasing number of Americans just like you are finding opportunities in the world of online foreclosure auctions.
"The biggest change is simply the numbers of people participating," says Dean C. Williams, CEO of longtime real-estate auction house Williams & Williams, which now offers online auctions. "Four years ago we would average seven buyers bidding for each property we were selling. Now it's up to 12.”
"It's really changed," says Ralph Roberts, a real-estate agent and co-author of “Foreclosure Investing for Dummies” and other books. The real-estate speculators who crowded the auctions got clobbered in the past two years and have largely slinked away, he says. "The new wave, it's the hardworking families next door."
And there's plenty of distressed inventory for bidders to choose from. "More than 850,000 properties were foreclosed on by banks in 2008, and more than 2.3 million properties were in some stage of the foreclosure process during the year," says Daren Blomquist, of foreclosure listing firm RealtyTrac, which also features online auctions on its site. Between 20 and 100 companies have stepped in to the online real-estate auction business in the past several years. (RealtyTrac is an MSN Real Estate partner.)
So who's selling? "It actually appears that the majority of sellers are investors who purchased foreclosed properties from lenders in bulk, often sight unseen, and are now just trying to unload those properties as quickly as possible," says Blomquist.
Special risks for special bargains
The properties now on the block are all over the place — literally and figuratively — but there can be good deals. And, occasionally, there are amazing deals, especially if a savvy bidder scores a home that's one of an increasing number auctioned without a reserve, or minimum bid. In the first 42 days of 2009, Bid4Homes.com had sold 135 houses for under $10,000 in 20 different states. (View a slide show of some of the most striking bargains sold.)
Bidding online for vintage trading cards or books was one thing. But buying real estate through online auctions, particularly foreclosures, carries unique risks. Among them:
- You're buying the property as is. If the furnace is bad, you can't come back to the owner and have him fix it.
- About half the states have "redemption periods," where the previous owner can conceivably come back and make good on their loan, thereby saving themselves from foreclosure. You don't take possession until after the redemption period expires, says Marc Sherby, author of “How To Buy Real Estate At Foreclosure Auctions: A Step-by-step Guide To Making Money Buying, Rehabbing And Selling Property From Sheriff Sales And Trustee Auctions.” The duration varies from 10 days (New Jersey) to 700 days (Tennessee), and rules for who's eligible for redemption vary hugely by state and even by county, says Sherby. "Most of the time people don't redeem the properties," he says, because homeowners don't have the money. Where it occurs most is agricultural areas where farmers are waiting to be paid for crops. But if you want peace of mind, approach the homeowner and ask to buy his right of redemption, for $500, or maybe $1,000, says Sherby.
- You rarely have a chance to have the property professionally inspected before you buy it.
- Some auctions are actually selling mortgages and liens rather than the property itself. "I would suggest that you completely stay away from buying mortgages or liens; it's not worth the risk," says Roberts. This is particularly true if you inadvertently purchased the junior lien (or second mortgage) on a home, which could get wiped out by the foreclosure process. However, most auctions sell actual property, and you can check the specific auction's rules to make sure.
- Bitter homeowners are more likely to trash the property on their way out.
- Not planning to live in your foreclosure purchase? Financing for an investment property is usually harder than for a primary residence — but that's true for all real estate, says Roberts. Make sure you get adequate homeowner's insurance and title insurance from reputable brick-and-mortar firms.
Convenience a factor
Despite all these risks, or perhaps because of them, the Web has been a big factor in the increased popularity of foreclosure auctions.
"It's a lot easier to do your due diligence, so that's something that in some ways demystifies the process," says Lisa Lauroesch, vice president of business development for Bid4Assets, which runs online auction site Bid4Homes.com.
Also, "You don't have to take a day off from your job, or spend your Saturday at an auction," she says. "In some ways it's less intimidating."
And this is huge: Unlike auctions on the courthouse steps, where a winning bidder might have to produce the cash in an hour, an online no-reserve auction doesn't require you to produce more than a deposit upfront, says author Roberts. "You could bid $250,000 at an online auction … and put down 10% and borrow 90%." (Other auctions do require more collateral.)
However, the winning bidder still needs to come up with the cash in a timely manner, which could be even 45 days, says Roberts. It depends on each auction's rules, so pay attention to the fine print.
Still, here’s his advice: While you don't have to have all the cash in hand when you're bidding online for a home, you do need to be absolutely sure you can get it. "Never bid on properties at an auction (online or off) hoping to get financing later. Get your financing first, and then place your bid." Otherwise you'll lose your deposit, and the home.
And in some cases, bidders aren't able to buy the properties for the amounts they got them for at auction because the lender won't approve the loan due to the discrepancy between the home's value and the amount paid, says Roberts. Most lenders want to see a loan-to-value (LTV) ratio of no higher than 80%, he says. That means that the property is worth at least 20% more than the loan being used to purchase it. This 20% protects the lender in the event the borrower defaults on the loan.