Buying a property at an auction may seem like a great way to find a good deal, but it’s worth thinking about the risks beforehand, which include ending up with a property that needs repairs or renovations. Get to know how auctions work and what’s involved before you enter the world of bidding wars and cash deals.
Key Topics
Looking for a real estate bargain? People often think real estate auctions will be a good place to find one, however this isn’t always the case because there are some risks associated with buying property at an auction. Understanding the home auction process is a good place to start when you’re looking at different ways to find investment properties. Once you understand how they work, you’ll be better equipped to decide if a particular property is a good deal or not, should you enter an auction.
How do home auctions work?
First let’s take a look at how homes end up being put on auction. There are two main scenarios that lead to this, and these are foreclosure and property tax defaults. In other words, if a homeowner hasn’t paid their mortgage for a few months, they can end up in default and their home will be foreclosed. Or if a homeowner hasn’t paid their property taxes, the tax authority will take the home and it will be auctioned in a tax lien auction.
Types of auctions:
- Absolute auction: The highest bidder wins this type of auction, whether its $1 or $100,000. These auctions generally have the highest attendance because there is no minimum amount to bid. Most lenders and government agencies use absolute auctions and once the sale is done it is final.
- Reserve auction: When it comes to reserve auctions the seller can review all the offers first, before making a decision. The seller doesn’t have to accept the highest bid and can accept or reject bids as they see fit. If anyone bids too low, it’s likely that the seller will reject it, in the hopes of finding a bid closer to what they had in mind.
- Minimum bid auction: Auctions that are minimum bid have a minimum amount that is set up-front for those looking to participate in the auction. You cannot go below this minimum because it’s often the amount needed to square off what’s owed on the mortgage or the taxes.
How to buy a house at an auction:
Before you go to an auction, take a look at the auction listings in the neighborhood where you’re searching and get to know what’s on offer, the dates and locations. Usually, the person who wins the bidding at an auction needs to provide cash, a money order or a cashier’s check for the amount that was bid, as well as a deposit, auction and bidding fees, before you even exit the auction.
So, before going to an auction you should make sure that you’ve got the funds ready and waiting, as well as your cashier’s check or alternatively any loan documentation, if the auction allows for financing.
There are two types of bids that you can make, either open bids or blind bids. In an auction where there are open bids, you can see the amount that everyone else is bidding. Conversely, in a blind bid, you cannot see what anyone else is bidding.
Open bids can create a bidding war, whereas blind bids often lead to bidders making their best bid right away, instead of holding back to see what others are bidding. As such, in open auctions, sellers can sometimes make more than they had anticipated.
If you’re at an in-person auction, you will need to get there early so that you can get your official card which you’ll use to indicate your bid amount. Auctions often require a refundable deposit payment which is 5-10% of the predicted selling price.
Pros and cons of buying a house at an auction
PROS:
- You can pick up great deals at auctions, sometimes without a lot of competition. Usually, lenders are just aiming to make up the money that they have lost by auctioning off a property, so they aren’t interested in making a profit. Which means that buying a property at an auction can be a bargain.
- Home auctions provide another avenue for property investors to find good deals for fixing and flipping or renting out.
CONS:
- Auctioned homes often need some work, whether it’s major upgrades, a bit of maintenance or a few repairs. The reason is because many homes that are on auction are foreclosed homes or homes with tax liens against them. Getting an inspection before you place your final bid isn’t always possible, so you run the risk of buying a property that needs work.
- You can end up paying too much for a home on auction. Auctioneers sometimes set the minimum price low to attract buyers, and then the bidding that ensues gets the price much higher. The trick is to set yourself a maximum amount that you’re willing to pay and not go higher than that.
- Another worst-case scenario is that the property has claims or liens against it, and those then become your responsibility once you take ownership. There may be creditors who haven’t been paid, and this can fall onto the new owner to take care of. One way to avoid this is to hire a search title company to make sure that there are no liens against the property, before you attend the auction.
How do online home auctions work?
You can attend both in-person and online auctions, and these days online auctions are becoming more common. If it’s your first time attending an auction, online auctions are a good way to observe and learn more. Each auction has specific rules, so make sure to look up each auction’s parameters before you attend.
Online auctions take place on real estate auction websites, which will require you to pre-register and show that you are a serious bidder. With online auctions being more accessible than in-person ones, there are more bidders attending these, so bear this mind when you’re looking for a property here.
How to find houses for auction in your area
The MLS (Multiple Listing Service) is a great place to find properties that are on auction. It is a property database arranged county by county, and showcases photos, occupancy status, lease information and more information on properties that are going to be auctioned.
Some other options are to use any of the websites that list properties on auction, look in your local newspaper for auction listings, check with banks and lenders, or visit the city hall office and check the public records to find homes that are in pre-foreclosure.
Determining how much to bid and what properties to bid on
Before you attend an auction, review the property and the location, and then take a look at similar properties in the area that are listed. You can determine a general price range for the property beforehand, to make sure that you don’t end up bidding too much.
The amount that you bid will be determined by the local real estate market, along with any repairs or renovations that the home could need. However, this also depends on if you’re an investor or if you’re buying the home as your residence.
Investors will be looking to make a profit by either fixing and flipping the home or renting it out, so this may impact that amount that they bid on it, as they will need to factor in some major upgrades as part of the amount that they’re paying.
Do you have to have cash to buy a house at an auction?
While each auction has its own rules and regulations, you’ll need to put a large amount of money down upfront. Most auctions require a deposit of 5-10% of the predicted purchase price, just to be able to bid on the property. Then, once you win the bidding, you’ll be required to pay for the property with cash or a cashier’s check.
So, it’s a good idea to take either cash or a cashier’s check with you for the full amount of the property, if you intend to close the sale there and then. Otherwise, you could lose out to someone else who may have the funds more readily available.
Be aware of the fees that may crop up at an auction as well, which you could be liable for too, if you win the bidding for the property. These can include fees from banks, auctioneers, attorneys, and other companies.
Final thoughts
Buying a home at an auction may seem like an attractive option and an easy way to get a bargain, but it’s worth considering the drawbacks as well, before you go down this route. Now that you know how auctions work, however, you should be in a better position to make the right decision for your own investing or home buying journey.