There are lots of people out there who think that buying a foreclosed home at auction is one of the best real estate deals that you can get. In some respects, they are correct. A foreclosure auction can indeed be a way to make an investment in a property that is worth far more than you paid for it.

However, at what point you buy a foreclosed home can make a big difference to not only how much of a bargain you get but also to how easy or difficult it is for the buyer. Here are the pre-auction and auction phase s explained, together with a few pros and cons:

Shortsales

By the time a foreclosed home reaches auction, the unfortunate homeowner has exhausted all their options. Sometimes a person facing foreclosure can agree to a short sale with a private buyer, usually selling the home for little more than they owe on the mortgage, to avoid foreclosure, repay their lender and save their all-important credit rating.

Pros - The seller is very motivated to sell and will usually agree to a price that is only a little more than they owe on the mortgage. A buyer can use a traditional mortgage to purchase the property and it is usually left in excellent condition. Buyers also have ample time to carry out inspections and title searches.

Cons - The shortsale process is as slow as a regular home sale and the price may still be close to market value if the seller had a large mortgage with very little paid off on the principal.

Sale as an REO

Also, often for some time after a home has been foreclosed on a bank with offer it for sale on the open market as an REO property. REO means real estate is owned by lender and the sale of the property is negotiated between a buyer and a broker acting on behalf of the bank. The home usually still goes for less than market value, but not at a rock-bottom price.

Pros - A buyer can still use a traditional mortgage (in some cases provided by the seller) and they will have plenty of time to carry out inspections.

Cons - The bank will not make any repairs to the property before sale, it will be sold as is. It is far from unusual for disgruntled homeowners to 'trash' their property before leaving a foreclosed home and the bank will not right any damage. The bank's broker will also usually still be negotiating for the highest possible price.

Sale at Auction

Once a property has been offered as an REO for some time and has gone unsold, a bank may put the foreclosed home up for public auction. This is where the real bargains are to be found as the bank at this point will set the auction starting price at whatever remains on the mortgage balance and will be willing to let it be sold at that price, only the auction bidders will drive it higher.

Pros - Prices for foreclosed homes may be very low if there as not too much left to be paid off on a mortgage. The competition for properties at auction is also less, as the cash only requirements will keep casual buyers away.

The process is fast, there are no long closing procedures and the buyer can take possession of their new property almost immediately.

Cons - The biggest con of buying at auction is not the cash only requirement, buyers who attend these auctions are usually real estate investors and are aware of the fact that the property must be paid for in cash that day. The biggest con is that buying foreclosed homes at auction is a big gamble.

The banks do not reveal property condition beyond a few photos or history and no inspections can be made by the potential buyers. At the point of auction, the property is truly being sold as is and often these homes are damaged, something that the buyer must be willing to accept.

Some of these homes are often in terrible condition. Often the previous homeowners have troubled backstories - they may have lost jobs, lost wages or ended up in trouble with the law, for an offense calling for the services of a Los Angeles DUI attorney for example - and the foreclosure process between themselves and the bank has been an acrimonious one.