Key Takeaways
- Three Foreclosure Stages with Varying Access: Foreclosure properties progress through pre-foreclosure (90+ days past due with potential short sales), foreclosure auction (public bidding requiring cash or cashier’s check), and bank-owned REO status (agent-listed with competitive pricing and possible inspections).
- Inspection and Timeline Trade-offs: Auction properties typically sell as-is without interior inspections and require immediate deposits upon winning bids, while pre-foreclosure and REO properties may allow inspections and longer purchase timelines with more flexible payment terms.
- Hard Money Lending Advantages: Hard money lenders like ABL qualify loans based on property value rather than personal creditworthiness, enabling fast financing for time-sensitive auction opportunities that traditional lenders often refuse due to increased risk.
- Essential Success Strategies: Investors must conduct thorough due diligence on as-is properties, secure financing before bidding, establish maximum bid limits upfront to avoid overpaying, account for purchase price plus renovation and holding costs, and build reliable teams including contractors and specialized lenders.
Buying property at auction or through foreclosure isn’t for everyone, but for informed investors with the right financing, it’s one of the fastest ways to build a real estate portfolio.
At ABL, we’ve helped countless investors buy discounted properties nationwide. Whether you’re looking to bid at auction or buy a bank-owned foreclosure property, our flexible loan programs offer fast, reliable financing to help you seize opportunities quickly.
However, first you have to learn the difference between an auction vs. foreclosure property.
What Is an Auction Property?
An auction property is a property for sale at an online or in-person bidding event. It could be a foreclosure auction, a tax deed auction, or simply a voluntary seller auction, where the owner chooses to offer their property to the highest bidder instead of listing it the traditional way.
What Is a Foreclosure Property?
Foreclosure is a legal process by which a lender seizes a property when the homeowner defaults on their mortgage. A foreclosure property goes through three main stages:
1. Pre-Foreclosure
Pre-foreclosure is the period between when a homeowner first misses mortgage payments and when the lender files an official foreclosure notice (usually once payments are 90+ days past due). Many homeowners in this stage may be willing to sell at a discount to avoid foreclosure.
If the homeowner is underwater on their mortgage (i.e., owes more than the home is worth), they may get their lender’s approval for a short sale, allowing them to sell below market value.
2. Foreclosure Auction
Once the property officially enters foreclosure, it’s put up for sale at a public foreclosure auction. This allows the lender to recoup their losses by drawing the outstanding debt plus any fees from the sale proceeds.
Anyone can bid on the property. However, if the highest bid doesn’t cover the outstanding debt to the lender (plus any fees), it may revert to the lender and become a bank-owned property.
3. Bank-Owned Property
A bank-owned property (aka a real estate owned or REO property) is one that the lender has in their inventory. Typically, they’ll list the property for sale with an agent, allowing anyone to make an offer. However, since most lenders don’t want to own real estate, they’ll price the home competitively.
Key Differences Between Auction and Foreclosure Purchases
Here are the core differences between auction and foreclosure purchases:
- Property inspections: Most auction properties are sold as-is, meaning you’re unable to inspect the inside before buying. However, foreclosure properties may allow inspections if you buy during the pre-foreclosure or REO phase.
- Purchase timeline: Auctions (including foreclosure auctions) often require at least a deposit as soon as your bid is declared the winner. Meanwhile, pre-foreclosure or REO property purchases may allow longer purchase timelines.
- Payment terms: Some auction properties allow financing, as do pre-foreclosure and REO properties. However, foreclosure auction properties typically require cash or a cashier’s check.
When comparing auction and foreclosure properties, here are some pros and cons to consider:
Pros and Cons of Buying at Auction
Pros: Potential for below-market prices, fast closing, transparent pricing, variety of properties
Cons: Limited or no inspection opportunity, all-cash or quick financing required, properties sold as-is, potential for hidden liens or title issues, high competition, binding commitments
Pros and Cons of Buying Foreclosure Properties
Pros: Possible inspection opportunities (especially REO), more financing options, clearer title (especially REO), negotiation possibilities with banks
Cons: Longer buying process, potential competition from other buyers, properties often in disrepair, possible occupancy issues, banks may be slow to respond
How Hard Money Lending Fits In
Fortunately, you don’t have to go it alone when buying an auction or foreclosure property. With a hard money lender like ABL, you can get the financing you need for a smooth transaction.
Unlike traditional financing, hard money lending is fast and flexible because it qualifies loans based on the property’s value more than your personal creditworthiness. This way, you can fund auction offers quickly and capitalize on time-sensitive opportunities. Plus, many traditional lenders won’t finance auction or foreclosure properties due to the increased risk.
At ABL, we understand real estate investing and are ready to support profitable deals. Whether you need a bridge loan to buy a property while you secure long-term financing or a fix-and-flip loan to finance acquisition and renovation costs all in one loan, we have you covered.
5 Tips for Success in Both Scenarios
No matter what type of distressed property you pursue, follow these best practices:
Don’t Skip Due Diligence
Proper due diligence is a must, especially when you’re buying an as-is property. Carefully review and analyze the property’s condition, title, and market before closing the deal.
Have Financing Ready
Auction properties move fast (including foreclosure auction properties). To ensure you can seize opportunities when they come, have your financing ready to go.
Set a Maximum Bid or Offer
In the heat of the moment, it’s easier to overbid on a property and end up with a poor investment. Avoid this by setting a maximum bid or offer upfront and sticking to it.
Understand all the Costs
To win a profitable deal, you must understand all the costs involved. These include the purchase price, any renovation costs, and holding costs (utilities, property taxes, loan payments, etc.).
Build a Reliable Team
The best real estate investors have reliable teams they can count on to execute deals. For example, consider partnering with contractors, attorneys, agents, and lenders like ABL.
Fund Your Next Investment Property With an ABL Loan
Both auction and foreclosure properties offer unique ways to build wealth through real estate. The key to success with either approach is thorough preparation, strategic decision-making, and—most importantly—having fast, reliable financing in place when opportunity knocks.
Ready to capitalize on your next distressed property deal? Pre-qualify for an ABL loan today and position yourself to act quickly when you find your next deal.