Researching a Foreclosure Property Before the Auction

In a normal purchase, contingencies protect you. If the home inspection reveals a cracked foundation or the title search turns up a lien, you can renegotiate or walk away. At a foreclosure auction, those protections are usually gone.

You typically buy:

• As-is, with no repairs or disclosures from the seller.
• Unseen, because interior access is rarely available.
• Without contingencies, so a winning bid is binding.
• With limited title protection, since the deed carries few warranties and title insurance is not part of the sale.

That means the work you do before the auction is your due diligence. Experienced auction buyers spend far more time researching properties than bidding on them, and they skip most of the properties they research.

A practical approach is to start from a short list of upcoming sales, research each one in the same order every time, and drop any property as soon as a deal-breaker appears. How to build a foreclosure auction target list covers that first screen; the steps below pick up from there. If you are new to auctions, start with how foreclosure auctions work.

Before you spend money on title work, verify the details on your list with the trustee, sheriff or foreclosure attorney named in the notice:

• The trustee sale number or court case number, and the date, time and place or online platform.
• The foreclosing lender and the recorded loan being foreclosed.
• The opening bid or estimated debt, if published.
• The payment terms and any deposit or registration requirements.

Pay special attention to which loan is being foreclosed. If a second mortgage, home equity line or HOA is foreclosing, the first mortgage generally remains on the property after the sale. A low opening bid on a junior lien can look like a bargain until you add the senior loan balance you would inherit.

If the sale has already been postponed, find out why. A workout in progress, such as a loan modification review or short sale, may end in cancellation, so decide how much research the property is worth.

A title search reviews the recorded history of the property to identify owners, loans and every lien. For auction purchases, many buyers order a title report from a title company or abstractor, or have a real estate attorney review the records. You can also do a preliminary search yourself at the county recorder's office or website.

Look for:

• All recorded mortgages and deeds of trust, and the order in which they were recorded.
• Property tax status and any tax liens or tax sale certificates.
• HOA or condominium liens.
• Municipal liens, such as code enforcement fines, utility charges or demolition liens.
• Federal or state tax liens.
• Judgments, mechanics' liens and any lis pendens from other lawsuits.

Which liens survive depends on lien priority and state law. As a general rule, the foreclosure wipes out liens junior to the foreclosing loan, while senior liens and certain priority liens such as property taxes can remain. Some states give HOA liens partial priority. Have a title professional or attorney confirm what will survive.

For a deeper walk-through, see title, liens and due diligence.

You will usually have to value the property without an interior view. Start with a comparative market analysis using recent sales of similar homes nearby, adjusted for size, age, lot and condition.

Then fill in what you can from public and outside sources:

• Public records for square footage, bedrooms, bathrooms, year built and lot size.
• Permit history for past renovations, additions or open permits.
• Past listing photos, which may show the interior as it was at the last sale.
• A drive-by to see the roof, siding, windows, landscaping and neighborhood from the street.
• Local agents and contractors, who can tell you how homes in that area sell.

Respect the property and the occupants. Do not enter the home, the yard or any outbuildings without permission, and do not disturb people living there. Trespassing can expose you to legal liability and is unfair to the occupants.

Because so much is unknown, use conservative values for both the current condition and the after-repair value. If your comparable sales suggest a range, plan around the low end.

Without an inspection, build your repair budget around what you can see and what is common for the property's age and condition. Many experienced buyers add a contingency reserve for problems they cannot see, such as plumbing, electrical, mold, foundation or roof damage. Homes that have been vacant can also have freeze damage, vandalism or missing fixtures.

Next, figure out who lives there. Signs of occupancy include cars, maintained landscaping, lights and window coverings. Utility records, mail and neighbors' observations are less reliable, and you should not question neighbors about the owner's situation.

If the property is occupied, budget for gaining possession through your state's legal process or a voluntary cash for keys agreement. Tenants may have extra protections that lengthen the timeline. How that process works is covered in after you win a foreclosure auction. Include possession costs, holding costs and the time involved in your numbers.

Turn your research into a single number before auction day. One common method works backward from value:

These figures are only an example; use your own local numbers. Some investors cross-check with the 70% rule, which caps the purchase price at about 70% of after-repair value minus repairs, but it is a rough screen rather than a rule for every market.

The auction bid calculator can help you run these numbers. If the opening bid is above your maximum, skip the property.

Owner-occupant buyers can use the same structure, replacing the profit line with a cushion for unexpected repairs and the extra cost of buying with cash. Whatever your goal, write the final number down before auction day.

Research is wasted if you cannot complete the purchase or if the facts change before the sale. Two things remain once your numbers are done:

• Funding. Make sure the deposit, the balance and your reserves are available in the form and on the timeline the terms require. How to line up funds for a foreclosure auction covers payment rules, sources and timing.
• Updates. Re-run your numbers if anything changes, such as a new lien, a different opening bid or new comparable sales. A postponed sale deserves a fresh title check before the new date, since new liens can be recorded in the meantime.

Write your maximum bid down for each property and bring that list with you. The night-before routine and how to hold to that number when bidding gets competitive are covered in auction day bidding strategy.