Buying Houses at Auction
One of the questions home buyers often ask is how do real estate auctions work? The question is often asked because they want to know how to buy a house at auction.
Buying a home at auction offers an exciting alternative to the traditional route – one that can be perfect for those who want to invest in real estate.
With both live auctions and online auctions, the opportunities for finding a promising investment have never been better.
Without a doubt, most people conjure up images in their minds of getting the deal of the century at an auction. While there is certainly the possibility of that happening, it is not always the case.
Of course, making a significant investment mistake is also possible, so it is essential to ensure you are prepared for the auction process.
Fortunately, it is easy to learn and approachable for just about anyone, as long as you move carefully and seek knowledgeable guidance when you need it.
The possibility of finding a solid long-term real estate investment from buying a house at an auction is pretty good.
Be sure, however, that before jumping in, you have a handle on how the auction process works. By the time you’re done reading, you’ll have a great handle, potentially finding a good deal on buying an auction property.
Real Estate Foreclosure Auctions Explained
The vast majority of homes sold at auction are foreclosures. Lenders want to get as much as they can for homes that borrowers have defaulted on, and auctions offer a convenient way to accomplish this goal.
Sometimes there will be a bidding war, just like purchasing a house in the traditional real estate market.
They also offer careful investors opportunities to find great deals. Buying a house at auction is facilitated by an auction house which is a company that handles auctions. Auction houses are also sometimes known as where the auction will take place.
Purchasing a house at auction, however, should come with quite a bit of due diligence. Seasoned real estate investors attend most property auctions, so they are not for the uneducated.
If you are considering buying a home at auction, there are a few things you should be aware of, including the following:
Live House Auctions
Knowing how to buy a house at auction is critical to avoid making a significant financial mistake!
Although online auctions are increasing in popularity, live house auctions are still very much a thing. Typically held in the county courthouse – although they can be held at any public location, like a hotel ballroom – live auctions require you to show up in person to make your bid. Quite often, houses in an auction also take place right on the property.
They are open to anyone interested in attending, although you will need to register to make a bid on a property. You will also need to demonstrate to the auction that you have the financial means to purchase a home – the total purchase price – before you can bid.
They are also known as in-person auctions. Specific auction companies will be in charge of selling auction properties. The auction company and their contact information will be part of the information provided in the auction advertisement.
What is an Absolute Auction?
There are many different types of auctions, including an absolute auction and a lender confirmation auction.
An absolute auction will award the property to the highest bidder. There is no “reserve price” with absolute auctions, which sets a minimum bid amount for the property to be sold. While unlikely to happen, if you were the only bidder at an absolute auction, you could acquire a property significantly under the market value.
With less competition, the winning bidder could end up very happy with an absolute auction.
What is a Lender Confirmation Auction?
A lender confirmation auction is a type of auction whereby mortgage lenders must approve the bid for the transaction to be completed. This type of auction can also be referred to as a minimum bid auction or a reserve auction.
The reserve price or guide price will be the minimum bid accepted for the property.
Whoever is the winning bidder must have the necessary funding and be accepted by the lender or the government. With this type of property auction, there will usually be starting bid or opening bid.
The auctioneer will suggest the bid amount to open the bidding process.
Steps For Buying a House at Auction
Let’s take a look at some smart tips for buying a house at auction. By following these steps, you’ll be better prepared for the auction day.
Research The Property Auction Before Visiting
Each home auction will have its own set of rules and requirements that you need to adhere to. Although it is perfectly fine to show up to a live auction to check it out if you are planning on bidding, you will need to complete a registration, including submitting financial documents.
Houses at auction quite often are publicized in local newspapers on multiple occasions.
Search For Properties Before You Go to an Auction
Finding the best deals is going to require going to different auctions. You can search foreclosure data for the area you are interested in and determine which auction will be selling the property you want.
A local real estate agent can help with this process, although be aware that the agent is not allowed to make a commission on a live auction sale.
Some of the best resources for finding properties going to auction can be found on sites like RealtyTrac. Foreclosure sales data sometimes is also available from the specific county either online or at the county courthouse or from a third-party foreclosure sales agent, known as a “trustee.”
Zillow, unfortunately, publishes information through RealtyTrac on their website showing homes for sale when they are not. In most of these properties, the owner has missed a couple of mortgage payments. Zillow treats these properties as if they have already been foreclosed on, which is not the case.
The owner often catches back up on their mortgage payments, and nothing ever happens with the property.
It can be very misleading to consumers. You can learn more here about why some homes posted for sale on Zillow are not actually for sale.
Check Out The Property For Yourself
You can’t go into a foreclosure property most of the time because they tend to be occupied. However, you can do a drive-by to get an idea of the state of the home.
Experienced investors will tell you that you can determine a lot about the state of a property by the way it looks on the outside. If it looks good, it probably is nice enough inside. If it looks terrible, it probably looks the same inside. Keep in mind you will be buying the home in as-is condition.
When you buy a house at auction, you won’t be able to have a home inspection like you would in a traditional home purchase.
Unlike a typical Real Estate transaction, everything is “buyer beware.” When buying a traditional non foreclosed property, the previous owner probably will have had some history with the home. They might even let you in on any known issues.
The Condition of The House Could Be Awful
In a foreclosure, the lender has never occupied the property, so more often than not, they know very little about the structure and potential problems that may be lurking.
In many instances, the person being foreclosed on has lost their home because of financial difficulties and has not had the money to keep up with general maintenance.
There could be substantial issues with the house that are not readily apparent. Some of the more expensive components of a home, such as plumbing, heating, and electrical systems, may have been damaged. There could even be structural problems. A property needing significant repairs is not uncommon.
I have witnessed plenty of foreclosed homes where the owner has taken out their anger on the property. I’ve been in a few foreclosures where the entire kitchen was removed! Vandals have also been known to strip entire homes of their copper plumbing.
Keep in mind disclosing the condition of a property and its know defects is not something the auctioneer or lender will be doing.
Nobody wants to find out the home they just bought at an auction is a real lemon! Auctioning a house does not follow concepts followed in traditional home sales. Make sure you keep that in mind.
Find Out Everything You Can About The Property
You can learn just about everything you need to know about a house before you buy it – you just have to put in the time and effort to do so. Learn about the estimated market value, the money owed by the borrower, and any other pertinent facts.
Any liens could become your responsibility if you buy the home, so it would be a good idea to have an attorney look into the possibility of liens before you bid. Houses at auction quite often have a myriad of problems associated with them.
You may even want to find out who owns the house and try to speak with them beforehand. If you’re lucky, they will be in the mood to share some information with you.
Have a Real Estate Attorney Do a Title Search
You must hire an attorney to do a title search. By doing so, you will discover if there are any other liabilities on the property. You will want to do this research well before the auction date.
Any liens could become your responsibility if you buy the home. Things like unpaid property taxes, court judgments, or mechanic liens are all possible landmines. You could end up responsible for tax liens or back taxes if you’re not careful.
Having unpaid taxes is not uncommon at all when buying a home at auction.
The faster you evaluate the legal status of the property you are interested in, the better, as this will help determine if it is worth it to put in an offer.
The last thing you want to discover is you just bought a home for $400,000 but then find out there is $100,000 worth of liens on the property. Doing a lien search is a must when buying houses at an auction.
Verify Everything on The Day of The Auction
Live home auctions can change at a moment’s notice. You may show up to find out the auction has been canceled due to the borrower paying the lender or selling the home as a short sale. So be sure to check the details once more before you head to the auction.
Get Your Financing in Place
Buying a house at auction with a mortgage is not possible.
Most foreclosure auctions accept cash, a cashier’s check, or a bank money order for payment. In most states, you will have to pay in full immediately after the auction concludes. A few states will allow you to pay a percentage at the auction and the rest within a particular time frame.
County foreclosure auctions often require advance deposits. The deposit amounts on foreclosure auctions usually run from 5% to 10% of the final bid amount of the property.
When an auctioneer auctions a house, they will expect your payment. Given these guidelines, it is not possible to get a home loan to finance auction homes. Your earnest money to purchase will be held in an escrow account until the closing.
Hard Money Loans Might Be a Good Option
Some real estate investors will seek out hard money lenders to finance the project, especially when it will be a fix and flip. Hard money loans do have their drawbacks, though, including much higher interest rates. You would typically only use this kind of financing when necessary or have a quick turnaround time.
The Home is Not Yours Until You Have The Certificate of Title
It can be exhilarating to win your first live house auction. After you brave the new environment, hold up your bidding card, and discover you are the winner, it is easy to assume you have overcome all obstacles – but you haven’t.
Until you have the certificate of title, you can still lose the property. The owner could pay off the loan or file an objection to the sale. Be patient and wait for the title before you celebrate.
Online Home Auctions
More and more investors are choosing online house auctions merely because they make everything easier. You can bid from anywhere over a set period, which could take days or weeks to finish. You can bid on various properties with online auctions, including bank-owned properties, short sales, non-distressed homes, and even commercial properties.
If you want to bid online:
Register For The houses in a Property Auction
Like live auctions, you have to register before you are allowed to bid online. Most online auction sites will require you to show that you are serious about buying by requiring a refundable deposit.
You give your credit card information and make a deposit that will be refunded if you do not win the auction.
Research The Auction Thoroughly
Online auctions make it easy for you to learn everything you need to know about the properties you are interested in and the rules of the auction site you are using.
It will take some time, but go through all the documents available so you get a clear understanding of the process and the properties. It is wise to go beyond what is provided by the site as well.
Consider hiring a Real Estate agent to help you research the property, including a title search.
Online auctions allow Realtors to make a commission from the sale, so they are likely to be more motivated to assist you in your research.
Get Your Financial Information Together
Once you win the auction, the process will go quickly, so you want to be prepared. Gather all the documentation for your purchase before you start bidding.
The site will want to quickly access your funds once you win, including an earnest money deposit – typically 5% of the home’s purchase price.
If you are bidding under a different entity, like a Limited Liability Corporation (LLC), make sure you have the necessary documents for that as well.
Get Title Insurance
Many of the properties sold through the auction will have liens which could become your responsibility if you win. To protect yourself, it is advisable to have title insurance. If you wind up with a property with one or more liens, title insurance will help protect you financially.
Work With a Realtor
Because online auctions allow Realtors to get paid for their services, it should be easy to find an experienced agent who will work with you during the auction process.
An agent familiar with the area you are buying can help you see your options clearly and avoid mistakes – saving you money and ensuring you get what you want out of your auction.
Other Important Information About Auctions/Foreclosures
Depending on where you are located, there are different procedures for initiating a foreclosure auction. For example, in Massachusetts, where I am located, the primary means of foreclosure is non-judicial (No court action).
However, suppose the deed of trust does not contain a power of sale language (documentation in the mortgage that allows the mortgagee to sell the property). In that case, the lender may seek judicial foreclosure.
With judicial foreclosures, the foreclosing party files a lawsuit in the county where the property is located and requests that the court grant a judgment allowing the house to be sold to satisfy the debt.
Judicial foreclosures generally take longer than non-judicial foreclosures, most of the time lasting from around six months to three years, depending on the state.
Buyers of foreclosed properties should also understand the owner might not have to move out of the house right immediately after the foreclosure sale. Depending laws of the state in which the property is located, the homeowner may stay in the house until the court confirms the sale.
In some states, the homeowner has the right to live in the house even longer during what’s called the “redemption period.” (A redemption period is an amount of time when the foreclosed homeowner gets the right to redeem or repurchase the home after the foreclosure. Learn more about the foreclosure redemption period in this article from NOLO.
Finding Local Houses at Auction
You are probably wondering how to find house auctions that are nearby. Besides going on Realty Trac and other online search sites, you can check the newspaper where foreclosure auctions are often posted.
One other method you may want to consider is a Google search. Searching such terms as foreclosure auctions near me or houses at an auction near me should present you with potential options.
Final Thoughts on Buying a House at Auction
Buying a home at a foreclosure auction sounds like an exciting proposition on the surface, especially if you can land a great deal. Just don’t fool yourself into believing purchasing at auction doesn’t come without risks.
Hopefully, the information provided has been enlightening, and you now know more about how to buy a home at an auction.
Additional Helpful Home Buying Articles
Read these additional home buying resources to educate yourself about the process of purchasing a house with less stress. These articles are written by well know top-producing real estate agents and mortgage brokers.
About the Author: The above Real Estate information on buying a house at auction was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 35+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.