Foreclosure (1) - Buying homes at auction is fraught with risk

Buying homes at auction is fraught with risk, and it takes a big investment of time as well as money.

By Mike Giusti, Bankrate.com

The allure of foreclosed properties to a would-be real-estate investor is nearly irresistible: Buy valuable properties for pennies on the dollar with little or no risk to your own money, work when you feel like it and grow rich.

Countless seminars and how-to books promise to turn even the novice buyer into a high-powered real-estate investor through the magic of foreclosed homes. The problem is that instant, safe, trouble-free wealth often turns out to be like most things that sound too good to be true -- a scam. If it were easy money, everyone would be getting rich off of foreclosures.

True, some people do, just like some people get rich in the stock and commodities markets, from oil wells and from foreign currencies. But, just like these other forms of investing, profitably buying and selling real estate takes research, knowledge, experience, money and time. And nearly every deal with a huge profit potential comes with an appropriately sized risk.

Beyond get-rich-quick seminars and informational classes offered by nonprofit agencies and local sheriff's offices, few professionals teach novice investors the ins and outs of foreclosure sales. Why should they show you how to buy a great property at a deep discount instead of doing the deal themselves?

Still, if you are willing to go it alone and invest the time and cash required to deal in foreclosures, your first step should be to understand the process as thoroughly as possible.

The basics

Foreclosure is the legal method by which lenders or governmental agencies take properties from owners who fail to make payments, and then resell those homes to recoup money owed them.

Nonpayment of a mortgage or home-equity loan is the most common reason a home is foreclosed, but it is far from the only reason. Homeowners could be facing a foreclosure because of a balloon payment on an adjustable-rate mortgage, not paying property taxes, not carrying enough insurance, or even failing to keep the property in good working condition, says Rande Johnsen, a trustee for Trustee Corp. in Irvine, Calif.