There are some important things to consider today when making an offer to a homeowner in foreclosure. If and when their home goes up for auction, the opening bid is calculated by the balance of the loan, court fees, attorney fees, and advertising costs for the legal ad. At the auction, the auctioneer will open the bid at that amount. If no one else bids, the house is sold back to the lender and it becomes a lender-owned property. However, if someone bids a price over the opening bid, the lender gets paid what he is owed in full, and the surplus funds will be used to pay a second mortgage or underlying liens. It may not be enough to cover the entire lien but they are entitled to whatever the amount may be. After all underlying liens are paid, if there are any funds leftover, it goes to the homeowner. However, not all states inform the owner of this and the homeowner usually has to file a claim to recover it.

I recently attended an auction in my county and there was a house that had an after-repair value (ARV) of $366,800 The opening bid was $94,000. Several people started to bid against each other and the house was sold at $216,000. That meant the buyer got the house for 59 cents on the dollar. It also meant the defaulting homeowner will receive about $122,000 dollars if they claim it.  I’m sure there are probably some junk fees that would be collected before the owner can receive it, too. Therefore, when I am offering to buy a house from a homeowner in foreclosure, I like to be up front with them and tell them that if their home goes up for auction, they are entitled to the excess funds if the home sells to a third-party bidder. I also them know that they may have to claim them.

Next, I explain the benefits of selling before the auction. I inform them that if they allow me to make an offer, we will calculate the amount they would receive if it goes to auction and sells for the average price. I show them some of the recent sales at the auction and what they might expect. Then I write an offer explaining that selling before the auction means they will not have a completed foreclosure against their credit which, in turn, could hinder them from getting another home in the near future. I also offer to help them find a place to live, like an apartment or rental house. I do this because in the past, some owners have no idea where they can move. Finally, I explain that my offer is a for sure thing, and if they choose to go to auction in hopes of getting more money, there is always a possibility that if no one bids, there will not be any money left over.

Therefore, when dealing with homeowners in foreclosure, we should try to get as close to what they might receive if it goes to auction.  In the case study described above, the house sold for fifty-nine cents on the dollar – which is not too bad. So, how can we do this?

Here is what I do;  I attend foreclosure auctions as often as possible and collect data on each house by writing down the opening bid, and if applicable, what it sold for. Next, I do the comps on the after repair value (ARV). Then I make note of what percentage it sold for.   At most county courthouse websites, you can usually print any documentation justifying the figures on what a house sold for.

In addition, there are many other benefits of attending foreclosure auctions. One very good reason is that gives you the pulse of the local market.  As long as there are investors bidding on houses, it is safe to buy in the hidden market. On the other hand, if you attend a foreclosure auction and there aren’t any investors, there is probably a good a reason why. It may just be a hint that now is not a good time to buy.  Although, I have seen investors buy during bad times as well as in good times – they just change their strategy. For example, in bad times, you buy and hold.

In real estate, I don’t put all my time in the foreclosure arena, the majority of my time is working the hidden market. The information I have provided is by no means the rule, it is just something to consider on your real estate investing journey.  However, since the beginning of the year, more and more homeowners are selling their homes before the auction date.

Tony Youngs has been an investor, trainer and a national speaker for over 32 years.  He is the Author of The Hidden Market System and is best known in the industry for his “Hands on In the Field” trainings that take place around the country.  Learn more about him by visiting TonyYoungs.com. This article was republished from Real Estate Investing Today, a weekly blog from the National REIA. Read more at realestateinvestingtoday.com.