New data shows fewer than one in four purchases at foreclosure and REO auctions involve financing, underscoring a substantial, untapped opportunity.

Nearly eight in 10 homes purchased at distressed property auctions are not financed by the buyer, representing a largely untapped market for the private lending industry.

An Auction.com analysis of 200,000 properties sold at foreclosure and bank-owned (REO) auctions since 2018 shows that only 21% of foreclosure auction purchases and 24% of REO auction purchases are attached to some kind of financing by the buyer—either in the form of purchase financing at the auction or post-auction, stand-alone financing (see Fig. 1).

A “Win-Win”

“There are not very many lenders who will lend on trustee sale properties,” said Landon Cunningham, vice president of client relations at Inland Capital, a Spokane, Washington-based lender that provides financing for purchases at foreclosure auctions, also known as trustee sales in some states like Washington. “A lot of lenders would say that’s a lot of risk. … We’ve been doing it for so long that we’re comfortable with the trustee sale process.”

Cunningham and his brother got comfortable with the foreclosure auction process by purchasing about 120 properties at trustee sales across the Pacific Northwest in the early 2000s. They eventually started a real estate brokerage and then Inland Capital to help other investors use leverage to purchase at foreclosure auctions.

“We just kind of know the process, what to expect, so we can walk the clients through,” he said, noting the lending side of the business now consumes most of his time. “If we can provide the funding source for them, they can go in and renovate the property, improve the community, make a profit. It’s kind of a win-win.”

Trends

Inland Capital is the exception, according to the Auction.com analysis, which matched Auction.com data with public record data to identify when the buyer used financing.

Out of more than 135,000 foreclosure auction sales to third-party buyers on the Auction.com platform between 2018 and the first half of 2024, only about 6,700 (5%) had purchase financing tied to the auction sale. The majority of those purchase loans were short-term loans from lenders like Inland Capital that specialize in lending to real estate investors, also known as hard money lenders. An additional 21,000 (16%) were financed by the auction buyer post-auction through a stand-alone mortgage, often in the form of a line of credit, commercial loan, or construction loan.

The trends were similar for properties purchased at REO auctions. Of about 67,000 properties sold via REO auction on Auction.com between 2018 and the first half of 2024, only about 6,700 (10%) had purchase financing tied to the auction sale. An additional 9,200 (14%) were financed post-auction by the buyer.

Washington state, where Inland Capital is based and does much of its lending, had the highest share of foreclosure auction sales financed by the buyer of any state: 39%. Washington was followed by Colorado at 38%, New Mexico at 36%, Nebraska at 36%, and New Hampshire at 35%.

States where the share of foreclosure auction financing was below the national average of 21% included Florida ( 11%) and Louisiana, Kansas, Montana, and Indiana (all at 13%; see Fig. 2).

Risks

There are some good reasons why many lenders shy away from financing foreclosure auction and REO auction purchases. At the top of that list is the inability to inspect the inside of the property in many cases.

“If we can see inside the property … (we’ll lend) 85% of purchase plus 100% of rehab costs,” said Ricardo Sims, general partner at Constitution Lending, a Connecticut-based real estate lender providing fix-and-flip and long-term loans to real estate investors. “If we can’t see the inside of the property, the LTV at purchase would drop by at least 20 points.”

Most distressed properties sold at auction are occupied, preventing any interior access, and even if the properties are vacant, interior access may be denied by the bank.

“Of the bank-owned properties, 70% are occupied, and of the foreclosures I would say 90%,” speculated Cunningham, noting the additional risk comes with dealing with current occupants after purchase, a risk he believes has increased in the last few years due to occupants who are less likely to leave voluntarily. “People who have been foreclosed on: they just stay there.

“I didn’t do an eviction the first 12 years I was in real estate, but I’ve had to do multiple evictions (this year),” Cunningham said.

Risk Mitigation: Due Diligence

With no interior access for foreclosure auction purchases, lenders perform as much due diligence as possible to mitigate their risk.

“We do a lot for our clients,” said an auction bid representative from a lender that provides foreclosure auction purchase financing in 15 counties across Oregon and Washington. “We conduct due diligence in terms of title searches and that sort of thing. We have someone go out and take photos of the properties. We post notes about the condition of the property, links to MLS listings, tax records, and we bid at auction for our clients.”

Careful due diligence is necessary because of the volatile nature of a forced foreclosure sale.

“Urban legend in the foreclosure community has it that a property burned down the night before a sale, so if it’s been more than a couple of weeks since we had eyes on a property, we do a drive-by before the sale to verify its condition,” said the auction bid representative. “It’s not that our buyers are averse to buying a property with fire damage or other issues… (but) they need to know the current condition, so they know what’s going to be involved in fixing it up to sell it.”

The unknown condition of properties combined with the volatility of the situation means that lenders often have to assume the worst when financing at foreclosure or REO auction, Sims noted. But it also means most of the buyers purchasing at auction are seasoned professionals well-equipped to handle surprises.

“It attracts pros and local real estate operators from that perspective,” Sims said. “Most people, and especially first-time real estate investors, are too wary of bidding without being able to get inside the property.”

Risk Mitigation: Local Community Developers

Most buyers on Auction.com are the professionals Sims describes: local community developers willing and well-equipped to take on the challenges that come with purchasing distressed properties at auction. Those local community developers represent relatively low-risk and repeat borrowers for lenders like Inland Capital, Constitution Lending, and Rain City Capital.

Cunnigham estimated that Inland has only foreclosed on five out of 3,000 loans over the years.

“They really have to be mismanaging the project (to default),” he said According to Cunningham, Inland Capital qualifies foreclosure auction borrowers primarily based on three criteria: experience, ability to handle renovations, and exit strategy. He estimated about 80% of Inland’s borrowers renovate and resell while 20% renovate and hold for rent.

Leveraging Innovation: Remote Bid

The typical down payment is 15% for a foreclosure auction purchase loan originated by Inland Capital. When a property is being sold through Auction.com, Inland leverages the Remote Bid feature on Auction.com to wire funds on behalf of their borrower when their borrower is the winning bidder. That has allowed Inland to expand its lending to markets where it may not always have boots on the ground to hand over cashier’s checks at the physical location of the auction.

“The remote bidding has been huge for us … our clients can bid on auctions without being there,” he said. “Auction.com kind of revolutionized the trustee’s sale process.”