For several years, I’ve been interested in getting into real estate investing. My internet businesses have done well enough for me to save up some cash that I can use to start looking at properties and getting my feet wet with some real estate investments.
I’ve been looking at purchasing some property in Tennessee recently as part of my plan to move my family from Utah to the Nashville area sometime this year. I’ve looking for a good deal on a home that we could buy and live in temporarily until it’s time for us to build something to live in long term. The plan is to keep the temporary housing as a long-term rental investment.
I decided to check out the foreclosure market to see if that might be an option for us. I searched Auction.com to see what they had listed. In a growing real estate market (which is the situation currently), the chances of finding an undervalued property are slim, because it’s usually easier for the owner of a home to unload the distressed property by selling it as opposed to letting it go through a foreclosure.
However, I happened upon a nice townhome in Thompson’s Station that looked like one my family could use to live in temporarily, giving us more time to get settled and build our dream home.
When I found out about this particular foreclosure auction, it was just a couple days away, but I decided last minute to attend it. By the time I’d done my due diligence on the property, I would have to buy a plane ticket to Nashville to travel to the auction the same day evening. Fortunately I had some JetBlue voucher codes from a Boy Scout fundraiser I’d attended several months prior, so travel costs wouldn’t be too exorbitant.
Buying a home through a foreclosure auction isn’t something you normally do on a whim, especially as a person who’s new to real estate investing, and who has never been to an auction with the intent to bid on something. (I did attend one in Utah more than a decade ago just to see how the process worked. At that time, I didn’t even have enough money to be a serious contender.)
With only one real business day left for me to do some due diligence on the property, I made a quick checklist of things I needed to know to mitigate the risk I was taking flying out to Nashville with the hope of purchasing this property in a 15-minute auction held on the steps of the Williamson County Judicial Center (the courthouse). After I made my own list, I consulted with two of my brothers, one a mortgage broker in Tennessee, the other an attorney with some real estate and foreclosure experience. Here is the checklist we came up with. The items on this list apply to the majority foreclosures. Hopefully you find them helpful if you’re planning to bid on a foreclosure auction.
Foreclosure Auction Due Diligence Checklist
- Why is the home going foreclosure instead of being sold?
This question is likely the first logical question a person would ask in a growing real estate market, as the current one is. Normally, if a person or couple is having financial difficulties, and there is positive equity (or even break even) in their home, they will sell the home, pay off the mortgage, and use the leftover to tackle other financial issues while they scale back on their housing expenses.
In this situation, I was able to find out that this couple had filed for Chapter 13 bankruptcy. I used the PACER database (a national index for bankruptcy courts and other information), to find the bankruptcy. A chapter 13 bankruptcy normally allows people to continue living in their home as long as they are not too far behind on their payments. In this case, some condition must have allowed the bank to force the property to be sold in attempt to recover the bank’s loan.
If the market is correcting (meaning it’s on the way down right now or a buyer’s market), houses going to foreclosure auctions are much more common, because homeowners are often “under water”, meaning they owe more on their homes than they’re worth. In that situation, they cannot just sell the home and pay off the mortgage from the proceeds of the sale.
- What’s the condition of the home?
One thing that makes foreclosure auctions a bit of a mystery is the fact that, unlike a home that’s for sale by an owner or on the MLS, you typically can’t inspect the home except from the outside. Normally, in the home buying process, you make an offer for purchase after having taken a tour through the home. Then, before closing on the home, you would have obtained seller disclosures, a formal property inspection, and otherwise made yourself comfortable about the condition of the home. You can often do all of those things with little or no financial obligation.
The same is not true with most foreclosure auctions. You can only guess at the condition of the interior of the home. In the situation I faced with the townhome for sale in Tennessee, I looked up the street address of the home on Zillow, and I saw that it had been listed for sale within the past year. Zillow had marketing pictures posted that were taken to try to sell the home. I was impressed with the interior, including that it was clean, and the pictures and decor in the home looked like it was a nice family that was likely just experiencing financial difficulties that were causing them to lose their home.
My brother’s brother-in-law lived close to the area. I called him and asked him to drive by the home and give me an opinion of it based on what he could see from the exterior. Everything on the outside looked well taken care of, so that checklist item passed.
I also called the office number listed for the community. I talked to a real estate agent who represented the builder, who is still building homes in that community. She told me about the homeowner’s association, the community pool, playgrounds, and the general feel of the area. I was comfortable, without having been there in person, that it would be a good place for my family, and a good investment if I could get the property for a discount.
- Are there tenants living in the property?
In a lot of foreclosure situations, there are people still living in the home. Once you buy the home at a foreclosure, it may become your responsibility to evict whoever is in the home, which may take some time and legal fees. Also, if there is an adverse situation in which the tenants might lose their cool and intentionally damage the property, that could reduce the value of the home after you’ve purchased it.
I looked up the Tennessee eviction laws, and they seemed reasonable to me, especially since I wouldn’t really need to use the home for several months.
My brother mentioned to me that the people who were being foreclosed upon might also have renters living in the property, and that there might be a rental agreement in place that I’d need to take into consideration.
Insurance: In order to minimize the risk of having angry tenants tear up a house after I’d purchased it, I checked with my insurance agent to see whether I could have the property insured against damage from the current occupants. He, a agent with State Farm, told me that it would cost (in Utah) about $300 per year, and that it would likely be a similar premium amount in Tennessee.
- What condition is the the property’s title? Is it clean, or does it have liens? Is there a second mortgage?
These questions all have to deal with figuring out who has claim to the property to ensure that you’re not putting yourself at risk to having to satisfy debts and obligations outside of the foreclosure auction purchase price.
One of the most important questions I had with the property was whether there was a second mortgage on it that I’d be required to satisfy after purchasing the property at a foreclosure intended to satisfy the first mortgage. This is a common situation, one that new real estate investors much ensure they understand well enough to not get themselves into trouble.
I also wanted to know about any liens from the homeowner’s association, property taxes owed to the local taxing entities, any contractors who might not have been paid for work done, or anything else that could affect how much my overall obligation would be to get a clean title.
I called the same title company that had been involved with the previous sale of the property, and whose name was listed on the foreclosure auction notice in the local newspaper. The nice people there did a free title search for me, and sent me over a report that showed that there was no more than a few thousand dollars from back taxes and unpaid HOA dues. I was comfortable with that title situation.
Preparing for the Foreclosure Auction
Through a little bit of research, including checking Zillow to see how much the property sold for the previous year, and considering the current market, which has been softening nationwide as well as in that area, I estimated the home’s value to be somewhere between $300,000 and $310,000. To be conservative, I set my bidding limit at $230,000. I hoped that I would show up at the auction, and that I’d be the only there besides the personnel from Auction.com running the auction, and I could pick up the property for $70,000 or more under its market price.
To become more informed about the process, I called the Auction.com support team, and I was told that I needed to bring cashier’s checks with me that had a combined value of the maximum amount I was willing to bid. I was told that it’s common practice to bring two checks, one for the minimum bid amount, and another for the additional amount over that number that I was willing to bid. For me,that meant that I needed grabbed two cashier’s checks from my bank, one for the minimum bid price of $195,000, the other for $35,000. The two checks combined would take me up to my bid threshold.
If you win the bid for less than the amount your cashier’s checks are made out for, Auction.com will send you a refund of the difference, typically within two weeks after the auction takes place.
The Foreclosure Auction
When I arrived at the courthouse about 40 minutes prior to the start of the auction, I went inside to see whether anyone there knew anything about the auction. The two people I spoke with told me that the auction was not in any way connected with the happenings and offices at the courthouse, only that the auction (similar to sheriff’s auctions and other similar auctions) took place on the courthouse step, as is customary in many parts of the United States.
About 30 minutes prior to the start of the auction, I met two members of the Auction.com staff outside on the front steps of the courthouse. They were getting themselves set up to register bidders and run the auction.
I registered for the auction using the tablet held by one of the Auction.com staff. During registration, I had to enter my contact information and disclose the amount I had brought with me in cashier’s checks. I was then given a bidder number written on a rectangular piece of construction paper.
Over the next 10-15 minutes, more investors started to make their ways to the courthouse steps. By the time the auction started, there were at least 12 investors, many of whom looked like this wasn’t their first auction. By that time,I felt like I might need more money in order to stay up with this competition. I asked the auctioneers if it would be possible for me to go grab some cash from a nearby ATM. The answer was no, not once the auction has started. I was told by the Auction.com staff very clearly that once the auction ends, the money must be presented then and there with no delay. You’re not even allowed to go get the money out of your vehicle. It must be on your person during the auction, and presented to them immediately following the auction if you end up being the winning bidder. That policy, the told me, came from past situations where people bid on a property, then change their minds after leaving the presence of the auctioneers. That situation is obviously a difficult one for the auctioneer and the lender, who have made significant efforts to settle the defaulted loan at the designated auction time and place, so the policy is definitely understandable, although inconvenient.
After mentioning to them that this was the first foreclosure auction I’d attended as a potential bidder, I asked several questions of both the people who would be running the auction. I asked about the starting bid, wondering whether that was the amount the bank would allow the property to go for. I was told that the banks tend to have a much lower starting bid than the credit bid, which is the minimum the bank is willing to allow the property to be auctioned off for.
The male Auction.com staff employee told me he hadn’t noticed that a lower starting bid made any difference in the number of people who attended the auction or the ultimate auction price, and he told me that as soon as the first person makes a bid for the starting bid amount, the auctioneer intentionally jumps directly to the credit bid price.
To begin the auction, the female auctioneer read off a bunch of required legal statements, described an auction that had been scheduled to take place that day but had been postponed. She then described the property I was there after, and in a few short minutes, after the long legal description and fine print details were quickly disclosed in a blur, she started the bidding process.
Bidding started at $195,000, as was posted on the foreclosure auction notice. Then, once there was a bid in for that amount, she immediately jumped to $244,000, which I understood was the credit bid amount the bank had set, which was almost $50,000 above the starting bid, and $14,000 more than I had brought with me.
Within a minute of the auction starting, I was already out of the running, so I decided to just sit back and observe, using the entire experience as a learning opportunity, convinced that I could make a go and have fun buying distressed properties to turn into rentals or to flip, including in situations where I’d need to do some repairs before selling the home.
It appeared as if several of the men at the auction were regulars there. They chatted as if they were at least acquainted with each other, likely from attending these kinds of auctions. Some appeared to know each others’ bidding tactics. Although it started out with five or six people regularly shouting out their bids, once the price passed $260,000, there were only three bidders left. One of them watched as the other two bid up the property, one going in increments of $500 over the current bid, and the other choosing to up the bid by a couple thousand dollars each time. It appeared as if the larger jump was an intimidation tactic.
The house ultimately went for $280,100 to a guy who didn’t start bidding until the price had reached the $260,000 range.
The ultimate going price was far above the $230,000 threshold I’d set for myself. I wondered why someone would be willing to bid that close to the recently verified (through a purchase) value of the home while also taking risks regarding the home’s condition. Just before the auction began, there was an interestingly time news release about the Federal Reserve having raised interest rates, which would likely tend to lower the value of the home. Also, although the real estate market in the Franklin area of Tennessee has been really hot over the past several years, it has shown signs that it may be slowing there, as it is in many parts of the country due to several interest rate increases.
Unless there were things about the home that would give it more value than what I saw, the ultimate buyer of the townhome I went to bid on seemed to either be willing to operate on very small margins in the case of trying to flip the home, or he may have been trying to pick up a rental property to hold on to. For me, it seems safer to simply submit low purchase offers to homes that I’ve had a chance to do due diligence on.
Conclusions About Buying a Home at a Foreclosure Auction
Although I didn’t win the auction at which I was a participant, the experience was a good one. I plan to use that avenue for investing in properties in the future. I’m planning to do more research to find areas where the investor competition may not be so high, and I’ll identify areas where market conditions and other factors will allow me to find a good deal.
Also, I’ll likely be more aggressive about using foreclosure auctions to buy properties when I have more liquid funds available, and when the market is stagnant or receding.