Buying a Foreclosure at a Home Auction? Here’s How Much You’ll Probably Spend

If you’re buying a house with cash, it makes sense to try to get as good a deal as you can — and that’s where auctions come in. But is it true that you’ll pay much less if you buy a foreclosed house at auction? And if so, how much of a discount can you expect? How much do foreclosed homes sell for at an auction?

You very likely can shave some cost off the final price when you buy a home at auction, but just how much that home will cost — or what level of discount you can score — will depend on a number of factors. You definitely don’t want to overpay, especially considering you might need to pour a lot of money into repairs and other problems once the home is yours.

To help you calculate how much a foreclosed home might sell for at auction, we talked to expert real estate agents with years of experience in the field of foreclosures.

How much do foreclosed homes sell for at auction?

Appraised value

One important factor in how much a house will go for at a foreclosure auction is its appraised value — the professional estimate of its worth in the current market.

The lender that’s trying to collect on the defaulted mortgage will order an appraisal on the home to determine its worth. They’ll then use that value as a starting point when conducting the auction.

An appraisal typically takes into account a home’s size, condition, features, and property. An appraiser will compare the home to others around it, taking into account recent sales prices for other homes with similar features. These comparable homes — comps — can give you a good idea of what similar homes in the area might be worth. (But, as we’ll discuss below, the home’s current condition might set it apart from other comparable homes in the area, dragging its value down until it’s been renovated or repaired.)

Also remember that, although you may be hoping for a discount, the bank is trying to recoup as much of the appraised value as possible. Therefore, your offer will need to take that into consideration if you’re bidding to win.

Michael Constantine, a top agent in the Pasco County, Florida, area, has extensive experience with foreclosures as a real estate agent and has also worked for major financial institutions. He gives a little insight to the bank’s perspective in these situations:

“It’s very difficult to gauge, because there’s some neighborhoods that, even if it goes to auction, the bank is going to have a stop-loss price based on the comps in that neighborhood. They are going to say, ‘Okay, we’re willing to take .80 on the dollar, or .70 on the dollar,’ and then there are other neighborhoods that they just flat-out want to get [the house] off their books.”

Knowing the ins and outs of the market you’re hoping to buy in will help you estimate a potential auction price. Using the Homelight Home Value Estimator can help. You’ll get even more insight with an experienced real estate agent, who can be an asset in understanding home sales, pricing, and appraisals of the specific home or homes you’re evaluating.

Behind-the-scenes financials

The next thing to consider in terms of an auction price is the financial situation behind the foreclosure. When a home goes up for auction, there’s usually at least one financial claim on the house, usually by the lender who’s been trying to collect on the home loan.

An auction price will depend partly on what the owner still owed on the previous owner’s mortgage. If the home is being foreclosed on, it’s likely because the owner couldn’t make the loan payments — not just once, but typically for about 120 consecutive days, or four months in a row — whether due to overwhelming debt, job loss, medical payments, or other reasons.

There may also be other financial claims or liens on the house. Those other claims might include:

• A second mortgage on the home
• A home equity loan or line of credit
• A lien due to unpaid taxes
• A lien due to unpaid HOA (homeowners association) costs
• A lien due to unpaid child support or other expenses

The mortgage lender may try to at least get the amount still owed on the house, which could affect how much they hope to get at auction.

Before you bid, it’s a good idea to run a title search, which will give you an indication of any liens on the home. You may have to pay a fee, but the $100 or so that it costs will be well worth it to know what you’re getting into.

Current market

Even when the bank has set an appropriate price for the home, in line with its appraised value, the current real estate market in the area can have an important impact on its eventual sale price.

In a robust real estate market — one with lots of interested buyers, lots of investors, and lots of potential for profit — the number of bidders competing for the auctioned home can drive up the price. As with any auction, it helps to know your maximum price ahead of time, so you can avoid being swept up in the heat of the action.

In weaker real estate markets, with fewer interested parties and less competition, it may be easier to get a lower price.

As you would expect, competition is neighborhood-specific. In areas with a lot of residential demand, flippers or future landlords may crowd foreclosure auctions hoping to snag a deal — just like you. Investors hoping for up to a 20% return on their investment will be competing with you for particularly juicy listings, but that doesn’t always mean you’ll be elbowed out of the competition. However, you do need to make sure your offer is informed and competitive.

And keep in mind that most foreclosures are not “turnkey” ready. They’ll likely need renovations, whether you’re living in it or you plan to rent to a tenant.

The condition of the home

A crucial component of how much you’ll pay for the home is its condition. When a home goes up for auction, the process for purchasing it will be different than if you were to buy a home in a more traditional way, with a full inspection. You may be required to buy the home “as-is.” Buyer beware!

Constantine warns buyers that auctioned homes may be in poor condition.

“Most of the ones that go to auction these days will not pass FHA or VA financing for numerous reasons,” he says, “mostly due to the age of the roof” — but also due to cracked stucco, wiring problems, and other code concerns. Appliances may have been ripped out, or there could be wood-destroying organisms like termites. Water damage may also be an issue.

There’s no guarantee that everything will be functional or work the way it’s supposed to. There may be damage that isn’t visible from the outside. The home may require extensive repairs.

Once the home is yours, you may find that the previous owner or occupants did not properly care for and maintain the home. Sometimes, in dire situations, the occupants may even have vandalized the home — sold the copper pipes, for example, or defaced interiors.

Even if you can’t conduct a typical home inspection, there are things you can do to better gauge the home’s condition.

Constantine recommends you do your due diligence.

“The easiest item to do in your due diligence phase is going to be to physically go and look at the permits that were pulled on the property, because you can learn a lot about a house based on the permit office.”

For example, can you see a new roof on the home? Was a permit filed for it? Or the addition on the back — was a permit filed for that?

If not, you’ll know going into the sale that the home will have a code violation. The code enforcement office can then tell you what the penalties for certain violations may be, so you can build that into your expectations.

One reason it’s so important to have a qualified, dependable real estate agent on your side is to help you with these due diligence tasks.

The process will be smoother, you’ll be better prepared for the auction, “and you’re also going to know what you’re getting into,” Constantine says.

How much you can expect to spend

So, then, how much can you expect to spend? The more research you’re able to do into a particular home, the better you’ll be able to answer that question.

Your own financial situation is the most important factor when determining your budget. You won’t be getting an auction foreclosure financed like a regular house — conventional lenders usually consider them far too risky.

How much cash can you pull together? Have you been saving for a long time? Can you afford to tie up that much cash all at once, and still have some money left over to do the inevitable repairs?

And if the home was occupied by renters (legal or illegal) or squatters, you may have to go to lengths to have the residents legally evicted, which could cost money, time, and trouble. Make sure to account for that possibility in your calculations. If you can safely find out whether someone is living there currently, do so (but don’t enter the property, because that’s illegal).

For the best chances at a winning bid, you’ll need to have cash in hand — or at least a cashier’s check that includes a significant earnest money deposit ready to be paid out that day. You’ll also need money for renovations, repairs, clearing the title, evicting any residents, inspections, HOA fees if applicable, legal issues if they arise, and any other costs that come up — so make sure the deal you’re getting on a foreclosed home is really a deal.

An experienced real estate agent who truly understands foreclosures can represent you, advocate on your behalf, and help you identify the diamonds in the rough that make foreclosure auctions so exciting. So contact one before you start shopping!

Header Image Source: (Michal Balog / Unsplash)