Beware Real Estate Bargains at Foreclosure Sales

The number of home auctions has soared along with rising interest rates, and the allure is great for buyers: Houses at auction can sell for 60 to 75 percent of fair market value. But buying a home this way isn't recommended for most individuals.

"You've got to know what you're getting into. If not, you will get burned very quickly," said Frank Alexander, a law professor at Emory University who specializes in real estate finance and affordable housing.

The biggest problem with auctions is often a very short window from the time a property is listed for sale to when it's auctioned. That means that potential buyers have little opportunity to investigate what they are bidding on.

There is little time to do a title search, check for unpaid back taxes or learn about the quality of the property. (As the new owner, you could be responsible for outstanding tax liabilities.)


"A homeowner facing a foreclosure is most reluctant to allow someone to knock on the door, come in and inspect their house," Alexander said. "So usually you're buying the property sight unseen. You can drive by it, but you can't go it inside to determine the condition."

And don't expect to take out a mortgage for the house. Most jurisdictions require payment in full in cash at the time of the auction.

So why would anybody but investors ever buy a home at auction?

Well, consider that a home that would cost you $250,000 on a multiple listing service could sell for as little as $150,000 at an auction.

The number of foreclosure filings -- default notices, auction sale notices and bank repossessions -- during the first half of this year surged more than 30 percent from the previous six-month period and more than 55 percent from the first six months of 2006, according to RealtyTrac, a marketplace for foreclosure properties.

As the number of foreclosures rise, the prices at auction should be lower, providing more deals.

Alexander said the rules of auctions change from state to state, with Georgia and Texas being the riskiest locales for buyers.

George Roddy, president of Foreclosure Listing Service Inc., a company that tracks foreclosure auctions in Texas, said the bulk of properties placed on the auction block don't sell and revert to the lender. Of those that do sell, most go to investors who fix them up and then resell the properties.

With the nationwide slowdown in home sales, a very small but growing number of people are turning to auctions for their homes.

"We see more and more people using this method to purchase the home that they're going to live in. But it is certainly not any great numbers," Roddy said.

There's another way into this market. Many of those investors, banks and the government resell some of these properties months after the original foreclosure.

Alexander said those auctions are a good chance for individual homebuyers, because the process is a lot slower. Buyers there have a chance to do an inspection, title search and line up financing.

"The prices are not as low," he said, "but the security is much better for the individual homeowner."