The decision to buy a house at an auction rests on your financial circumstances, how well you've prepared yourself, and if you can financially tolerate the risks. Auctioned homes come in a range of conditions, from no issues to hundreds of problems.
There are several things to consider and actions to take before you jump into a home auction hoping for a great deal. Learn more about house auctions to help you decide whether it is an option for you.
Most commonly, homes are seized and auctioned for one of two reasons, foreclosure or property tax default. These are important to know because they might help you evaluate the home.
If a homeowner does not make their payments for several months or renegotiate the mortgage with the lender, the lender can file a notice of default with the county recorder. If the owner continues not to make payments, the lender can legally force the homeowner out for nonpayment and place the home up for auction. These foreclosure auctions are held by bank-hired trustees.
This occurs when the owner does not pay the assessed property taxes on their home. In these cases, it is the unpaid tax authority, rather than the bank, that seizes the property. The resulting tax lien auction is conducted by a local sheriff, clerk, or the county or local tax authority’s comptroller’s office.
Once homes are foreclosed on or seized, they are listed as auctions and scheduled. You will have to register and submit a refundable deposit of 5% to 10% of the property’s expected selling price to the entity holding the auction. If the auction is in person, be sure to check in at least an hour before the scheduled start and obtain an official card, which you will raise when you are ready to bid.
You can place bids on and win a property at auction in a few different ways.
The starting price of the auction may be the balance owed on the mortgage or a lower amount designed to spur bidding. In a foreclosure auction, the lender is not allowed to profit from the auction.
One way to find auctions is by contacting local governments directly or visiting their websites for information and then following up by phone to confirm the details. Another is through sites such as RealtyTrac.com and Auction.com. However, online information is not always accurate.
Properties may be listed that are in pre-foreclosure, because the owner is behind on payments. These properties may never go up for sale because their owners catch up on payments or come to an arrangement with their lenders.
Local real estate agents and brokers can also be valuable resources. Unfortunately, you may not find them eager to help, because agents and brokers do not automatically earn commissions on live auctions. However, these realtors can earn commissions through online auctions.
Direct multiple listing service (MLS) reports are far more valuable to potential buyers than online listings because they contain the full data for the listing, including photos and, most important, nonpublic broker comments. This information can cover property defects, financing options, occupancy, and tenant leases.
Keep in mind that foreclosure auctions are often postponed or canceled, even at the last minute. The lender might not have obtained all the paperwork it needs, or the borrower may have worked out a solution to avoid foreclosure.
Before you bid, you’ll want to hire a title search company to see who might hold liens against the property. As the owner, you will become responsible for any liens, which means more money out of your pocket.
There may be other claims against the home—not just tax liens but also contractor liens or a second mortgage. Bidders should check with the auction company to ensure the property has a clear title.
In some cases, the (former) owner or a squatter will be occupying the property, and you will have to evict them—an often-lengthy process that can be unpleasant at best and expensive at worst. It could be more advantageous simply to offer them several thousand dollars upfront to move out and hand over the keys.
Auction properties rarely provide potential buyers with the same level of access as traditionally sold properties. You will most likely not be permitted to walk through the property with your agent at your convenience, although some auction companies offer open houses. The best way to gauge an auction property is to work with professionals—real estate agents, appraisers, and contractors—who understand construction and remodeling costs and can accurately assess the property's current and future value and the cost of the work it needs.
A house could have all kinds of problems—remember, it used to belong to someone who couldn't afford the mortgage or property taxes, so the owner probably could not afford any routine maintenance or repairs. Furthermore, once the loss of the home appeared inevitable, the owner may have intentionally neglected it or even seriously damaged it. Left vacant, a property may have also been vandalized.
If you can't afford the risk of buying a property in poor condition, it's best to stick with auctions that allow you to inspect the property before bidding. Without this information, it can be hard to know what you are getting into, what a property's repair costs will be, and its actual value until after you become the owner.
The best way to assess an auction property is to work with real estate agents, appraisers, and contractors. These industry representatives understand construction and remodeling costs and can accurately estimate the property’s value and the cost of the work it may need.
Even if you can get a home inspection, there are limits. Problems behind walls, in ceilings, and under floors might not be apparent until you take possession. If the utilities are turned off, you may be unable to detect leaks, electrical problems, broken appliances, or malfunctioning HVAC equipment.
Buying a property at auction usually requires a lot of cash. Each auction company and county government has its own requirements for payment, but you will probably need cash just to secure your right to bid.
Down payment amounts and purchasing methods often depend on the property and the auction house. More flexible financing options may be available by purchasing a bank-owned property traditionally. Also, be sure to look for and understand the auction fees you will be expected to cover.
If you've won, you'll need to bring cash, a money order, or a cashier's check for the sum required by the auction holder. Typically, you must pay for the property in full immediately after winning the auction. Occasionally, you may have until the next day to complete payment. Failure to complete the payment may result in forfeiting your deposit and receiving a ban from future auctions.
Be prepared to provide proof of funds to show you can complete the purchase. If you are bidding as a business entity, such as an LLC, a trust, or a limited partnership, you may need to show your entity documents.
Winners go through escrow and closing just as with any other home purchase. For auctions that allow financed purchases, you’ll need to get prequalified beforehand. Some auction houses prefer that you work with their affiliated lenders and will have those lenders on-site at the auction. However, research ahead to determine the interest rates available from competing lenders. This information may give you some leverage.
If you win an auction, you’ll want to buy title insurance during escrow or immediately after closing to protect yourself against any liens not uncovered during the title search.
Refrain from doing anything until you hold the title. Avoid the urge to start renovations or move into the property immediately after getting your certificate of sale. You might not receive the certificate of title for about 10 days.
The property is not actually yours until you hold that certificate; the owner could still retain their right to the home by filing an objection to the sale with the court or by paying off the loan.
Some websites you can visit to look for house auctions are RealtyTrac, RealtyBid, Auction.com, and Hubzu. There are many more to choose from, but be sure to investigate to ensure they are valid.
One of the best ways is to contact a real estate agent or view listings in your area. You can also look on home auction websites for auctions.
A bank auction property is one that a bank seizes and auctions after a borrower defaults on a mortgage.
Foreclosed homes may be financially appealing, but there are many obstacles to consider before buying. Also, just because a home is for sale at auction does not mean you’ll be able to get it at a good price (or that the house is a good deal at any price—it could be a money pit). However, for savvy and motivated individuals, property auctions are worth exploring as a way to pick up a home or an investment property inexpensively.
Auctions are a riskier way to purchase a property than through a real estate agent. It’s essential to be knowledgeable about the process and the properties you are interested in bidding on. Working with a local real estate agent or broker to identify potential properties may help, although they may not be interested unless you can reach a compensation agreement.