of the best things you can do for your real estate portfolio is learn how to buy REO homes at auction. REO stands for “real estate owned,” and REO homes are properties that are owned by a bank or other foreclosing lender. When banks take back foreclosed-upon homes, they sometimes hire auction companies to unload these properties. Banks sell foreclosed properties at auctions to reduce their inventory of REO properties and clear their books of outstanding debt.
Getting Started Buying Bank-Owned Properties
Bidders must be registered prior to the auction with the company conducting the auction. Generally, winning bidders must immediately give the auctioneer a deposit, payable in cash or cashier’s check only. Deposits are typically between 5 and 10 percent of the outstanding loan amount, and the winning bidder must be able to close in cash within 30 days. In some cases, however, you may be responsible for payment in full upon winning the auction. The deposit amount varies from state to state and the auction company handling the sale. Some states require winning bidders to pay the full sales amount the same day as the auction, as do some online auction platforms.
Tips for Buying REO Homes at Auction
There are other considerations for real estate investors bidding in REO auctions, too. All properties are sold “as is” and prospective buyers should inspect the homes prior to the auction, so they know what they are bidding on. Moreover, an owner or tenant living in the house may or may not be cooperative about moving out.
Lenders use auction companies because they move inventory quickly. But bank-owned foreclosures aren’t the only type of property on the auction block. Sometimes homes are sold at HUD auctions, IRS auctions, “repo” auctions or sheriff’s auctions. In some cases, the minimum bid on an REO home at auction will be equal to the outstanding loan amount, but this is not always the case. Depending on the type of auction in which you are bidding, winning the property could mean you are liable for other debts and liens on the home, including overdue taxes, back interest, attorney’s fees, and homeowner’s association (HOA) fines, fees, and dues. Your final cost may be higher than the “sticker price” on the property, so do your due diligence ahead of time to make sure you know exactly what you are bidding on.
4 Steps to Prepare for Buying REO Homes at Auction
Following are steps you can take prior to buying bank-owned homes at auction events:
STEP 1. Inspect Properties Prior to Auction
Bank-owned properties offered at these foreclosure auctions are sold “as is,” meaning the buyer is responsible for any and all repairs. This means that inspecting the property before the auction is critically important. Contact the real estate listing agent or auction company to schedule an appointment to inspect the property. Drive around the neighborhood and look at the quality of the community. Also, talk with adjacent property owners and get as much information about the neighborhood and the previous homeowners as possible. Walk through the house and determine in writing how much it will cost to repair the property. Add the repair costs to your auction bid.
You can use RealtyTrac’s home value and property records database to find out the latest market value of a property.
STEP 2. Read the Fine Print
Carefully read all the terms and conditions of the foreclosure auction before attending the real estate foreclosure auction, or bidding online, especially any fine print. This information can usually be found in the auction brochure or on the company’s website. If you’re not sure about the language in the terms and conditions, have your real estate agent or attorney explain it to you. Make sure you understand bidder eligibility, financing, deposits, closing deadlines, closing costs, purchase agreements, disclosures and other bidding requirements. You will be legally bound by these contracts so make sure you understand them.
STEP 3. Find Financing.
After inspecting several properties and narrowing down your short list of homes, investors and homebuyers should secure financing. While many live auctions have lenders available onsite, it is a good idea to have your financing prepared in advance of the auction. If you can’t secure financing on a property within the required timeframe, your deposit payment will probably be forfeited.
STEP 4. Registration
Many auctions — both online and live — require bidders to register either onsite or online. If you are bidding at a live auction, make sure to arrive early to get a good seat and to give yourself time to prepare for the auction. Check the auction company’s website before you attend a live auction and make sure the properties you are interested in bidding on are still available. Sometimes foreclosed homes are sold prior to the auction.
Two Types of Deeds Granted in REO Auctions
When you purchase an REO property at auction, you may receive a general warranty deed or a special warranty deed. You must know the difference! A general warranty deed shows that the title is clear, whereas a special warranty deed simply states there have been no title issues with the property since the bank took ownership of the property. Special warranty deeds do not mean that there are no title claims or pre-existing liens on the property, so real estate investors should research every property’s history carefully, including doing everything possible to ascertain if the title is clear, prior to bidding.
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