Newsflash: a bargain isn’t always a bargain at auctions. Often, you pay too much and once the euphoria of winning goes away, you can’t escape that sinking feeling: “this house isn’t worth its price.”
Don’t beat yourself up. You aren’t the only person to explore buying a house at auction without knowing how to buy a house at auction.
Below, we discuss the nooks and crannies of buying a house at auction. Keep reading to find helpful suggestions from proven real estate stakeholders on securing a worthy home at auction.
What Is a Real Estate Auction?
A real estate auction is a bidding event that a licensed auctioneer organizes to sell a property to the highest bidder (notwithstanding the current market price). It is usually organized either by a homeowner, homebuilder, the government, or a bank.
Real estate auctions offer a wide variety of properties for sale at different price points. There are auctions available for HUD homes, foreclosures, non-distressed real estate-owned properties, and tax liens. Notable examples of real estate properties usually available at auction are single-family homes, multi-family homes, as well as commercial properties.
Why Does an Auction Happen?
A real estate property may be auctioned for various reasons, but the most common reason is when the current owner is having financial difficulties. Sometimes people simply need to sell a property quickly, such as after a death in the family, a divorce, or a relocation.
Another reason is when a homeowner fails to make timely payments to their lender. In that case, the lender may be forced to foreclose on the property through an auction.
Likewise, a house may be auctioned if the owner fails to pay the required property taxes. In such scenarios, the tax authority seizes said property until the homeowner intervenes with the relevant payment.
How Does the Auction Process Work?
The benefits of buying a home at auction include having more options and potentially getting a better deal. Buying a property at auction may have less competition than purchasing a home the usual way, however, you will be dealing with a different pool of potential buyers — often experienced investors.
However, the most significant risk of buying at auction is that you may not know enough about the auctioned properties for sale, putting you at risk of making a costly mistake. To avoid one such challenge, you’ll need to peruse and sign heaps of paperwork (like title documents, title searches, special conditions of sale, and other related papers), ideally with a real estate attorney’s assistance.
There are many distinct auction houses, and each one has its own set of protocols. Within a single auction house, a range of house auctions may be available. They must also abide by the laws of the state and the municipalities in which they operate.
Before you bid, make sure you understand the foreclosure auction rules and regulations. That’s to ensure that due diligence is strictly followed during the auction process.
Types of Auctions
Depending on the property owner’s preference, residential property auctions can be organized in five ways, whether it’s an in-person or online auction.
1. Absolute Auction
In an absolute auction, the highest bidder wins, regardless of the size of their bid. There’s no minimum bid here, and as a result, it attracts motivated buyers. Absolute auctions usually have the most competitive bidding since bidders know they can get the property if they outbid each other.
The majority of lenders and government bodies favor absolute auctions as well. All sales are final, and there’s no way for the auctioneer to back out if the offer is too low.
2. Minimum Bid Auction
Unlike an absolute auction, there is a minimum bid amount on a property in this form of auction. The minimum bid is announced before the auction begins, and if you’re bidding in person, the auctioneer will reveal the minimum bid amount before the auction begins.
In the case of a foreclosure, the minimum bid is usually the balance owed on the mortgage or the taxes payable in the case of a tax lien. Likewise, all sales at or above the lowest bid are final.
3. Reserve Auction
In this form of auction, the process is a little bit different. Bids are regarded more like offers in a reserve auction, in that the seller can accept or reject the proposal, as seen in real estate transactions. In such scenarios, the auctioneer typically has a minimum bid auction in mind but refuses to divulge it in the hopes of getting a higher price at auction.
In essence, these bid amounts are only known to the seller leaving the bidders with no choice but to raise their bids. Thus, in a reserve auction, if your bid is less than the seller’s minimum asking price, the seller has the right to reject your offer instantly.
4. Open Auction
In an open auction, bidders are aware of the amount of any preceding bids. In most cases, bidders prefer open auctions because they can observe what the competition is doing and adjust their bids accordingly. It creates bidding wars among potential buyers, and sellers can occasionally profit handsomely.
5. Live Auction
This type of auction is a fundraising approach in which bidders assemble in a specific place to compete for the different properties for sale. Bidders are allowed to bid continually until the auction ends.
The different auctioned properties are arranged in lot numbers during the live auction, and each lot number corresponds to a specific piece of property. When the bidding begins, the auctioneer will pick each of the lot numbers in order and declare them one by one, starting with the lowest bid until it gets to the maximum bid.
The property will then be awarded to the highest bidder when a countdown is announced.
What to Do When Buying a House at Auction
If you want to learn about how to buy a house at auction, this section provides in-depth information on how to go about it.
1. Conduct Proper Research on the Area
Decide on the area you’re interested in and research the place before contacting the auctioneer.
2. Know the Appropriate Source to Find Auctions
One way of finding auctions is by contacting local governments directly or browsing their websites for information and then calling for details. Another option is to visit sites like Homes by Ardor.
Such sites provide in-depth info on different houses at auction. That way, you can start bidding from the comfort of your own home before meeting the auctioneer in person.
3. Check the Terms and Conditions
Don’t forget to read the auction house’s terms and conditions before bidding. After all, you wouldn’t want any surprises on the day, so familiarize yourself with the terms of sale, what has to be paid, and when.
Even if there are many factors to consider, it’s an opportunity to have some fun, and it doesn’t have to be complicated. You have a good chance of succeeding and finding a bargain if you do your research, familiarize yourself with the terms and conditions, and are explicit with your bids.
4. Set Your Budget
Another factor to note when learning about how to buy a house at auction is to consider the highest amount you’re willing to spend on the property. That’s because while auction properties may be cheaper than market value, they often require improvements. Make sure you know how much the deposit will be and what type of payment will be needed so you can make sure you have enough money.
5. Set Up Viewings and Inquiries
Contact the auction house to schedule a viewing once you’ve found a property you like. Make sure to investigate it and the surrounding area thoroughly. Consider bringing a builder with you to determine what repairs may be required and how much they will cost. Also, don’t hesitate to ask the auctioneer any questions you may have.
6. Consult a Professional Real Estate Agent
Before the auction, consult with a local real estate agent to obtain an estimated market value. A real estate agent can also assist you in comprehending the auction’s terms.
Likewise, most real estate agents can run a title search to confirm that the property is clear of tax liens and other encumbrances that you may be responsible for if you are the successful bidder.
7. Request for Updates About the House at Auction
You can always request that the auctioneers notify you of any changes or additions to the sale conditions. If you’re genuinely interested, ask them to tell you if they might sell the property before the auction date. This does happen on occasion.
8. Get a Copy of the Auction Particulars
Critical information will be included in the particulars, but you may need to request a separate legal pack to get the entire picture. Since legal documentation differs from one property to another, have an attorney review the legal pack for any hidden loopholes that could cost you more than you bargained for in the transaction.
9. Bid With Cash
Most real estate auctions do not support buying a house at auction with a mortgage, so be prepared to pay cash. The most typical requirements are that you must do your homework before the auction, come prepared with money, and register with the auctioneer to acquire a bidder number.
You must act quickly to increase your chances of winning because many bidders may be interested in the property. If you end up getting the winning bid, you must complete the paperwork and pay for the property either immediately or within 24 hours of receiving it.
The payment is usually due after the auction. Most auctioneers accept verifiable funding options such as cashier’s checks, although cash is preferred.
10. Obtain Ownership of the Property
Depending on the circumstances of the auction and applicable legislation, you may or may not access the home on the same day if you’re the winning bidder. The delinquent borrower will likely continue to live in the foreclosed home until the lender obtains ownership of the property and the title, which they’ll transfer to you.
Be aware that in some states, a homeowner who loses their home at auction due to unpaid property taxes can redeem or repurchase it within a certain period known as the “redemption period.” However, that homeowner must work with the local government agency that oversaw the delinquent tax auction process to redeem the property.
The delinquent homeowner must pay the rest of their taxes throughout a cancellation period, which can last up to a year. As a result, you will receive a complete refund if you purchased a home at auction and the homeowner later redeemed it before the end of the cancellation period.
Buying a House at Auction Without Cash
There might be a scenario whereby you’re short of cash, but you’re interested in buying foreclosure properties. That shouldn’t hinder you from making a move. There are ways to buy a house at auction without cash, so don’t panic . Below is a list of lending services to obtain quick cash if you don’t have the financial resources to buy houses at auction.
1. Borrow From Hard Money Lenders
The first option is to take out a home equity loan from a local hard money lender. A hard money loan is a form of loan in which the borrower receives funds to help in securing a commercial property. Typically, private investors or businesses issue these loans.
To begin the procedure, gather all necessary information on the investment property you intend to purchase. Second, deliver all of this information to the lender before the auction. If your application is approved, you will get your funds in time for the auction.
The criteria for getting these loans does not solely rely on your credit score but also in the property you intend to buy. However, they come with a higher interest rate compared to other lending services.
2. Seek Funds From Peer-to-Peer Lending Sites
Peer-to-peer (P2P) lending allows people to obtain personal loans from other people directly through an online platform. As a result, financial institutions are no longer required as intermediaries. Prominent P2P platforms include UpStart or Funding Circle, among others.
However, if you are a newbie investor, this funding method may not be ideal for you. Many peer-to-peer lending sites demand that your credit history and assets meet specific requirements. Nonetheless, it can be an excellent way to get the cash you need to participate in “cash only” auctions.
3. Using Government-sponsored Loans
Some government-sponsored loans allow you to purchase a property without the need for down payments. Major government agencies that give this kind of loan include USDA loans, VA loans, and FHA loans. You can apply for these loans if you don’t have enough cash to buy a house at auction. Each loan has its own set of requirements that you must meet.
Generally, as long as the house is located in a qualified area within the state, you can apply for these loans.
Conclusion: Is Buying a House at Auction Advisable?
If you research thoroughly and are willing to take risks, buying a home at auction may be a fantastic deal. However, you must do your homework and ensure you’re purchasing a first-position lien rather than a second-position lien that could be wiped out. Know your cash obligations and when they are due, as well as the risks associated.
That’s why real estate investors looking to flip a house for a profit usually attend auctions. It’s best for folks who have a lot of experience or aren’t afraid to seek help filling gaps in their knowledge.
It’s also a good idea to go into the process with enough cash on hand, as that reduces the risks. Considering everything will help you get a house at auction for a good price