How Can Investors Get a Good Deal Buying a House at an Auction?
Looking to invest in buying a house? You may not have thought of property auctions. It’s one of the fastest and easiest channels to acquire a property, but also comes with higher risks. That said, with a good auction strategy, you can get the best deal for your dream home or investment portfolio.
If you’re like most beginner investors, you’re intimidated by the entire auction process. In this guide, we share the basics of house auctions. We tell you:
- How buying a property at an auction works
- Whether it’s a good idea to buy a house at an auction, and
- The best tips to help you buy a house at auction.
Ready? Let’s begin!
What Is a Real Estate Auction?
Real estate auction refers to the public sale of a property to bidders at a forum conducted by a licensed auctioneer. The property can be sold by a homeowner, government, bank, or homebuilder.
The bidder with the highest offer usually gets the property, but not in all scenarios, such as reserve auctions (more on this below).
Why Are Houses Put Up for Auction?
There are several reasons a house could end up for auction. The most common ones include:
- Foreclosures: When a homeowner hasn’t paid the mortgage for a few months, the house may fall into default. When this happens, the bank or lender files a notice of default with the county. If the homeowner fails to pay the balance owed or renegotiate the mortgage with the bank, the lender takes possession of the house and puts it up for auction to repay the loan.
- Tax default: Unpaid property taxes can also result in the property going to auction. When this happens, the tax authority seizes the property and puts it up for auction.
- As-is sales: In some cases, the homeowner wants to cash out the property quickly, as-is. Usually, sales on auction markets are faster than on traditional markets, making it a desirable way to unload a home.
How Do Auctions Work?
The house auction process starts with the seller, who sets a minimum sale price, known as the ‘reserve price’, in writing. The reserve price is not revealed to prospective bidders before the auction.
On the day of the auction, the licensed auctioneer announces the attributes of the property and any other relevant details, including the deposit required and restrictions on the title. The auctioneer then announces or calls for an opening bid, usually the reserve price. The price is then raised progressively as more buyers place their bids.
Once the reserve price has been reached or exceeded, the auctioneer will indicate so by saying something like “this property will sell today.” The person with the highest bid wins and completes the transaction, which is then signed and accepted by the auctioneer on the seller’s behalf.
That marks the end of the sales contract.
Generally, when a property is sold at an auction, the settlement process is similar to when a home is sold. You’ll be required to pay between 5-10 percent of the purchase price as a deposit when the contract is signed. The balance is cleared at the date of settlement, which is typically 30 days after the auction date.
Types of Real Estate Auctions
Regardless of whether the auction is held online or in-person, it can be conducted in one of three ways. An auction company may apply one or all of these types in a single auction, depending on the preferences of the property owner.
- Absolute Auction. In this type, the highest bidder wins, irrespective of the bid amount. Most bidders prefer absolute auctions since there is no minimum bid amount. For example, if the bid started at $200 and you are the only one who showed up, you could win the bid at $200! It’s also the preferred auction type for lenders and government agencies since sales are final, and the seller can’t back out in case of a too-low bid.
- Minimum Bid Auction. This type has a minimum bid amount on the property on sale. The amount is usually published in advance, and the auctioneer will announce the bid amount before starting the bidding process. Typically, the minimum is the balance owed on the mortgage if it’s a foreclosure case or taxes owed in case of a tax lien.
- Reserve Auction. In this type, the highest bid is treated like an offer, and there’s no counteroffer like in the other two auction types. The seller has a minimum amount in mind but doesn’t share it. The seller reserves the right to accept or reject the winning offer within 72 hours.
Why Should I Buy a House at Auction?
It’s possible to find your dream property at a tremendous price at an auction since the lender is eager to cut their losses and recoup the balance due on the mortgage and the foreclosure costs.
Advantages of buying an auction home
That means, you can enjoy benefits like:
- Great bargain. You can purchase an investment property at a great deal (below market value).
- You can immediately start earning income due to the quick sale process at auctions, assuming the house doesn’t require a lot of renovations and there is no redemption period.
- Fast closing. You can own a home within 30 days after the hammer falls.
Risks of buying a house at auction
Auction properties are associated with various risks:
- You risk buying a piece of junk if you fail to do your due diligence since auction homes are sold as-is.
- You risk overbidding if you’re new to the process or if there’s high competition.
- You must have the cash to pay for your purchase. Most auctions require you to prequalify by showing that you have the cash available to complete the purchase, usually on the same day as the auction.
- You have no guarantee that the property is yours, even after winning the bid until you have the title with your name on it.
How to Buy a House for a Good Price: Best Tips for Investors
If you’ve set your mind on buying a house at an auction, you must tread carefully to avoid making the most expensive mistake of your life. Here are guiding tips to help you make sound financial decisions:
1. Preparedness is key
As a real estate investor, you should always plan your payment options in advance. Each auction has unique requirements, but you’ll most likely need cash to pay for the property in full immediately after winning the auction or after a specified time period.
You will also need to have the deposit amount (usually 5-10 percent of the purchase price) paid at the close of the auction when the sales contract is executed.
In some cases, you may be given 24 hours to complete the payment, failure to which may result in forfeiting your deposit and being banned from future auctions. Therefore, prepare to show proof of funds.
You can also buy a house at auction with a mortgage, as long as you have good standing with your lender. If the auction allows financed purchases, you may be required to get prequalified before the auction date. Some auctions may require that you work with their affiliated lenders, who will be available on-site.
If you don’t qualify for a mortgage, you may explore alternative financing options like bridge loans or hard money loans, and specialist auction finance.
2. Do due diligence
You’ll be investing a lot of money in the property. So, it goes without saying that you should do thorough research on the home before investing. Remember, there are potential risks and benefits of buying a house at an auction. You want to weigh these risks and rewards to make sure you’re getting a good deal.
In most cases, you might not be able to get a proper inspection before buying the investment property. This means you could end up replacing the entire roof or wiring system, or encounter other problems you didn’t anticipate.
Therefore, be sure to do your own checks on the property through the local council and relevant authorities to see if you can find the home’s history and probably get photos of the interior.
You should also drive through the neighborhood, peek through the window, and make sure no one is living in the house. Most importantly, research the local market to form your own view about the property’s value.
3. Have liens and title search conducted
As part of your due diligence, you want to make sure the house has a clean title. Conducting a search will show you if the property has pending legal or occupant issues. It’s advisable to hire an attorney or a title company to run a title search.
As for tax liens – unpaid debt attached to the home – make sure there aren’t any. You don’t want to inherit a house with pending liens, as this will mean more money out of your pocket.
4. Set a budget
Whether you’re making a cash payment or being financed, always work with a budget. The key to success in real estate investment is to know one’s limit when it comes to purchasing a property. This way, you’ll know when to walk away and avoid overpaying for an auction home.
5. Understand the type of auction
To help you determine important factors like minimum bid amount, acceptable offer, and auction rules, be sure you understand the type of auction. The minimum bid amount gives you an idea of how much money you’ll need to bring or commit. Knowing the acceptable offer helps you avoid overpaying or walking away empty-handed.
6. Bid smartly
Most auctioneers require you to register either in-person or online. If it’s an in-person auction, arrive at the venue at least an hour early, sign in with the auctioneer and get your bidder card. You may be required to put down the deposit amount to prove you’re a serious buyer.
Once the bidding commences, maintain calmness, and don’t let emotions and excitement run the show. Buying a house is a big expense that comes with many responsibilities. So, you want to bid wisely.
7. When the hammer falls, and you’ve won…
If the auction closes and you’re the successful bidder, be ready to finalize the deal as per the auction rules. You may be required to pay the full amount immediately or at least put down a deposit within 24 hours.
In some states, you can obtain ownership immediately, while others allow a redemption period. This is when the owner who’s just lost their home due to unpaid taxes or loan default can rebuy it within a specified period.
If you purchase a home at auction and it’s later redeemed by the original owner, you’ll get a refund for your purchase. The only way to guarantee ownership is once the title is issued with your name on it.
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The Bottom Line
Buying a house at auction can be a tricky and daunting endeavor. Use this guide to learn how real estate auctions work. A useful rule of thumb is to understand the risks, do your due diligence, research the market, and bid wisely.
You may want to seek the services of a real estate attorney – specifically one experienced with foreclosure sales – to get a deeper understanding of the responsibilities and liabilities of buying an auction home. In addition, consider attending a few auctions beforehand to get a sense of how things work.