What is Foreclosure?
A foreclosure occurs when the lien holder on the property takes back ownership, usually due to a failure by the buyer to pay. The lien holder in most cases is the bank. Foreclosure laws vary by state, but foreclosure is always a process. At the end of the process, the buyers either pay what they owe the bank or lose the property. If the latter occurs, the home is sold through auction or goes on the market as Real Estate Owned (REO).
What is an Auction?
A property auction can occur for a number of different reasons. Foreclosure is one of those reasons. Others include homes taken by the government when the owner fails to pay his taxes, when the owner dies and the estate is sold, or when the owner decided to willingly place the property in a public auction in the hopes of quickly finding a buyer who will pay a good price for the property.
Disadvantages of Foreclosure
Foreclosures have serious drawbacks for all of the parties involved. A foreclosure does serious damage to the credit score of the buyer who loses the home. The bank ends up with a piece of property that might not be resold for quite some time and might not bring in enough money to cover the outstanding balance of the loan. Long foreclosure processes can also make things challenging for the impatient real estate investor.
Disadvantages of Auctions
An auction of property for any type also happens to have its own disadvantages, too. For one, each state has very specific rules about how property is purchased in these auctions. You will also need at least a portion of the purchase price when you win the auction and may have as little as 24 hours to pay the balance. As a result, you'll have to be prepared with cash on hand and a budget for the property you want when attending the auction. Because most auctions start with minimum prices for the property, you may not always get the deal you want. Some auctions actually end with many of the properties going unsold.
Foreclosures and Auctions for Investors
Foreclosure properties are a good choice for investors, particularly if they are purchased through an auction. However, many investors find their best deals at tax lien sales where the starting prices are usually only the outstanding tax amount and administrative fees. If the property ends up as an REO, the cost is going to be higher which means the profit potential is reduced.