Bargains at foreclosure auctions?

More and more often people are asking me about foreclosure auctions as an opportunity to purchase a property for a home or as an investment. That folks are comfortable enough to begin thinking of investment opportunities is a good sign; that there are enough foreclosures to stimulate such thinking is not. After explaining that I’m no expert in real estate investment strategies, I do share my observation that the best deals can be had not at the foreclosure auction but by subsequently purchasing a property that has recently been foreclosed. Here’s how I see it:

In almost all foreclosures, the foreclosing lender is also the high bidder at the auction and so becomes the new owner of the property. Other possible buyers who show up at the auction tend to be looking for steep bargains and are unwilling to match what is bid by the bank. The foreclosing banks make relatively high bids for a number of reasons. The foreclosing lender has a fiduciary obligation to the borrower to obtain a fair value for the property and while there’s certainly no requirement that the auction obtain fair market value, the law requires something close to that absent extenuating circumstances. When the bank bids this higher amount, it is also trading one asset on its books (the debt owed by the homeowner) for another asset (the foreclosed home) of relatively equal value. This puts off the realization of the loss by the bank.

Although the foreclosing lender almost always becomes the new property owner, that is at best a temporary arrangement. Banks do not want to be in the business of owning real estate, so to move foreclosed properties off their roster of assets expeditiously, foreclosing lenders, as demonstrated by our statistics) tend to sell off these properties to third parties at significant discounts. So if you think you’re ready to move into the real estate market, track the Notice of Mortgagee’s Sales published regularly in the local newspaper. If you spot a property that interests you, attend the foreclosure auction and even bid if you think there’s a chance of success, but don’t be disappointed if you lose out to the foreclosing lender. Once the auction is over, just go up to the representative of the lender, identify yourself, and express your interest in this particular property. If the circumstances are right, you could end up the owner of the property at an extremely attractive price.