Key Takeaways
- Auctions sell properties "as-is" with no inspections, warranties, or financing contingencies.
- Pre-auction due diligence includes title search, exterior inspection, tax status, and occupancy check.
- Junior liens may survive the foreclosure sale—title research is critical.
- Budget 30%+ below ARV to account for unknown interior conditions.
Foreclosure auctions (trustee sales) offer significant discounts but carry substantial risks due to limited information and due diligence opportunities.
How Foreclosure Auctions Work
Foreclosure auctions are conducted by a trustee (non-judicial) or sheriff (judicial) at a public location (often the county courthouse steps). The opening bid is typically the amount owed to the foreclosing lender plus fees and costs. Bidders must bring certified funds—typically the full bid amount or a significant deposit. Winning bidders receive a trustee's deed or sheriff's deed. Properties are sold "as-is" with no warranties, no inspection rights, and no financing contingencies. If no bidder meets the opening bid, the property reverts to the lender as REO.
Why it matters: Understanding this concept is essential for making informed investment decisions.
Pre-Auction Due Diligence
Since you cannot inspect the interior before auction, due diligence is limited but critical. Research: title search (identify all liens—the foreclosing lien is eliminated but junior liens may survive), property value from comps and exterior inspection, tax status (delinquent taxes transfer to the buyer), occupancy status (occupied by owner, tenant, or vacant), and neighborhood analysis. Drive by the property to assess exterior condition. Estimate repairs conservatively based on age, neighborhood, and visible condition. Budget for worst-case scenarios since interior condition is unknown.
Why it matters: 1. **Title Search**: Pull a preliminary title report — check for senior liens, IRS liens, HOA liens, and mechanics liens that survive foreclosure 2. **Property Visit**: Drive by the property; photograph exterior condition; check for occupancy status 3. **Comp Analysis**: Pull 3-5 comparable sales within 0.5 miles and 6 months; calculate ARV conservatively 4. **Repair Estimate**: Estimate rehab costs based on exterior condition + age + neighborhood standards; add 25% contingency for unknowns 5. **Max Bid Calculation**: ARV x 65% - Estimated Repairs - Profit Target = Maximum Bid (use 65%, not 70%, for auctions due to added risk) 6. **Funds Verification**: Confirm you have certified funds/cashier's check for the required deposit (typically 5-10% of bid) 7. **Eviction Research**: Check local eviction timeline and costs; budget $3,000-$8,000 and 30-90 days for occupied properties 8. **Insurance Quote**: Get a vacant property insurance quote before bidding — standard policies do not cover auction purchases Remember: You CANNOT back out of a courthouse auction purchase. If you win and cannot close, you forfeit your deposit and may face legal consequences.
Auction-Specific Risks
Auction buying carries unique risks: no interior inspection (hidden damage can be catastrophic), title issues (junior liens, tax liens, or code violation liens may survive the sale), occupant eviction costs and delays, overbidding in competitive auctions, and inability to finance (most auctions require cash). Experienced auction investors limit risk by specializing in specific neighborhoods (deep local knowledge), budgeting 30%+ below ARV to account for unknowns, and maintaining cash reserves for unexpected issues.
Why it matters: Understanding this concept is essential for making informed investment decisions.
Key Takeaways
- ✓Auctions sell properties "as-is" with no inspections, warranties, or financing contingencies.
- ✓Pre-auction due diligence includes title search, exterior inspection, tax status, and occupancy check.
- ✓Junior liens may survive the foreclosure sale—title research is critical.
- ✓Budget 30%+ below ARV to account for unknown interior conditions.
Sources
Common Mistakes to Avoid
Bidding at foreclosure auctions without conducting a title search first
Consequence: Discovering surviving liens (IRS, HOA, municipal) after purchase that exceed the discount obtained
Correction: Always order a preliminary title report before bidding. Factor all surviving liens into your maximum bid calculation.
Using the standard 70% rule for auction purchases instead of the more conservative 65%
Consequence: Insufficient margin to cover unknown interior conditions, title issues, and eviction costs
Correction: Use 65% of ARV (or lower) for auction purchases. Add 25% contingency to repair estimates for unknowns.
Test Your Knowledge
1.What is the recommended MAO factor for auction purchases (vs. the standard 70% for wholesaling)?
2.Which liens typically survive a foreclosure sale?
3.What should auction buyers budget for occupied property eviction?