What to Know About Buying Houses at Auction
Are you wondering if an auction for houses could be an excellent avenue to purchase a property?
One of the questions home buyers often ask is how real estate auctions work. The question is often asked because they want to know how to buy a house at auction.
Houses at auction offer an exciting alternative to the traditional route – one that can be perfect for those who want to invest in real estate.
With both live 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 needed.
The possibility of finding a solid long-term real estate investment by 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. You’ll have an excellent understanding when you’re done reading, potentially finding a good deal on buying a house in an auction.
Why Are Houses Sold at Auction?
Real Estate Foreclosures Lead to Houses at Auction
The vast majority of homes sold at auction are foreclosures. Lenders want to get as much as possible for homes that borrowers have defaulted on, and auctions offer a convenient way to accomplish this goal.
A mortgage lender will file foreclosure proceedings when borrowers fail to make several mortgage payments. A servicer can proceed with foreclosure when loans become 120 days in arrears.
Mortgage holders must make efforts with owners on alternatives to foreclosure to ensure they can attempt to keep the home when possible.
When homeowners cannot pay what is owed or restructure a repayment plan with the lender, they can put the property up for auction.
Property Tax Default Leads to a House in Auction
Another possible circumstance for houses at auction is a lack of paying real estate tax assessments.
Houses can also end up at auction due to a lack of paying property taxes. Local authorities can attempt to seize the property for payment in this circumstance. A tax lien will be put on the property first.
From there, two things could happen. A tax lien sale could be where the lien is auctioned to a bidder. The winning bidder would then be able to attempt to collect the money owed.
The lien holder can auction the house when the owner does not pay. The second possibility is a tax deed sale. With tax deed sales, the property is sold at auction.
How Do Auctions For Houses Work?
With auctions for houses, sometimes there will be a bidding war, like purchasing a home 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.
However, purchasing a house at auction should come with much 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 increasingly popular, 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 occur right on the property.
They are open to anyone interested in attending, although you must register to 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 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 selling the property.
While unlikely to happen, if you were the only bidder at an absolute auction, you could acquire a property significantly under the market value.
The winning bidder could be happy with an absolute auction with less competition.
What is a Lender Confirmation Auction?
A lender confirmation auction is whereby mortgage lenders must approve the bid to complete the transaction. This type of auction can also be called a minimum bid or reserve auction.
The reserve 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.
Types of Bids at Auctions For Houses
There are two types of bids when auctioning a house: open and blind.
Open Bidding
With open auctions for houses, you know the amount of any bids. Most bidders prefer this process as it allows you to see what the competition is doing and raise your bid accordingly.
When there is little competition, a lower bid may win the property. It’s also possible that open bidding could result in a bidding war.
Blind Bidding
As it sounds, blind bidding is when you don’t know what other potential buyers are doing. It is like in a traditional home buying scenario when you get into a bidding war with other buyers.
In many circumstances, buyers will put their best foot forward instead of seeing what other bidders do.
This bidding type is riskier for those with little experience buying houses at auction.
Steps For Buying a House at an Auction
Let’s look at some smart tips for buying a house at auction. Following these steps will prepare you for the auction day better.
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 plan on bidding, you must 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 sell the property you want.
A local real estate agent can help with this process, although be aware that the agent cannot 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 several 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 on Zillow are not for sale.
Check Out The Property For Yourself
You can’t go into a foreclosure property because they tend to be occupied most of the time. 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 will probably have 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.
Many of these properties have been abandoned by the owner.
Remember that disclosing the condition of a property and its known defects is not something the auctioneer or lender will be doing.
Find Out Everything You Can About The Property
You can learn everything you need to know about a house before you buy it – you have to put in the time and effort to do so. Learn about the estimated market value, the money the borrower owes, and any other pertinent facts.
Any liens could become your responsibility if you buy the home, so having an attorney for real estate look into the possibility of liens before you bid would be a good idea. 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 gladly 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. If you’re not careful, you could be responsible for tax liens or back taxes.
Having unpaid taxes is not uncommon 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 House 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 recheck the details before heading to the auction.
How Much Should I Bid For a House on Auction?
Understanding what to pay for a house at auction is essential. It is easy to make mistakes when you have never purchased at an auction.
Knowing the costs to make the property livable to your expectations is critical. For example, you would not want to pay more if a similar home could be purchased in the local marketplace for $400,000.
Knowing local real estate market values is crucial. Ask a local real estate agent to provide a comparative market analysis if unsure.
Knowing the renovation costs will be essential to know what to offer. Speaking with a few contractors could be valuable to ensure you don’t overpay.
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 must pay in full immediately after the auction. 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, getting a home loan to finance auction homes is impossible.
Your earnest money to purchase will be held in an escrow account until the closing.
How to Buy a House at Auction Without Cash
Buying auctioned houses without cash is challenging. Your best bet is to get a personal loan from a family member or a hard money loan.
Hard Money Loans Might Be a Good Option For a House in Auction
Some real estate investors will seek hard money lenders to finance the project, especially when it will be a fix and flip. However, hard money loans have drawbacks, including much higher interest rates.
You would typically only use this 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 repay the loan or file an objection to the sale.
Be patient and wait for the title before you celebrate.
What Are Online Home Auctions?
More and more investors are choosing online house auctions 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 about the properties you are interested in and the rules of the auction site you use.
It will take some time, but go through all the documents available to understand the process and the properties. It is wise to go beyond what the site provides 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 will likely 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.
Once you win, the site will want to quickly access your funds, 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), ensure you have the necessary documents for that.
Get Title Insurance
Many 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, finding an experienced agent who will work with you during the auction process should be easy.
An agent familiar with your buying area can help you see your options clearly and avoid mistakes – saving you money and ensuring you get what you want from your auction.
Other Important Information About Auctions/Foreclosures
Depending on your location, 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 grants a judgment allowing the house to be sold to satisfy the debt.
Judicial foreclosures generally take longer than non-judicial foreclosures, most lasting from around six months to three years, depending on the state.
Buyers of foreclosed properties should also understand that the owner might not have to move out of the house 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 the 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.
Pros and Cons of Buying a House at an Auction
Let’s have a final look at the advantages and disadvantages of auctioned houses.
Pros
- The potential exists you could purchase a home under market value.
Cons
- Auctioned homes are sold as-is.
- A home inspection is not possible.
- Work completed may not have a building permit.
- You need cash to purchase.
- There could be liens on the property.
- There could be unpaid HOA fees.
- Title issues may exist.
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. 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
- How to plan for a mortgage – one of the essential steps in buying a home is getting your financing. See some excellent tips on procuring a mortgage.
- Wise home-buying etiquette – get some solid advice on buying your first house.
- First-time home buyer advice worth knowing – follow some sound first-time buying advice, and you’ll have a much better purchasing experience.
- What is earnest money when buying a home – one of the more critical subjects for homebuyers to understand is how earnest money works. See what you need to know.
- Own a home to build wealth – purchasing real estate gives you one of the best opportunities to build wealth over land terms. Buying homes at auction is just one method to meet your goals.
Read these additional home-buying resources to educate yourself about purchasing a house with less stress. These articles are written by well know, top-producing real estate agents and mortgage brokers.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above Real Estate information on buying a house at auction. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 37+ Years.
Are you thinking of selling your home? I am passionate about Real Estate and love sharing 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.
