How to Buy a House at Auction: Step-by-Step Guide
LS
Last updated 03/20/2024 by
Lacey StarkSummary:
Are you looking to buy a house that would normally be out of your budget range? Do you consider yourself a bit of a risk-taker and willing to put in some hard work to make a house a home? Can you complete your due diligence and come up with a ready pile of cash? If you answered yes to these questions, you might want to consider buying a house at auction. It’s not a decision for the faint of heart, but the result could lead to the house of your dreams for significantly lower than market value.
When someone looks for a new house to buy, they usually call a realtor, drive around neighborhoods they’re interested in, and start surfing online real estate websites. But that’s not the only way. Real estate auctions are an excellent, albeit risky, way to find your new home or investment property.
You can’t just show up at an auction and start the bidding. There’s a lot to learn before you step into the auction ring. Read on to learn how to buy a house at auction, armed with all the tips and tools you’ll need for a successful purchase.
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Why are houses sold at auctions?
Homes sold at auctions are typically the result of some financial difficulty on the part of the owner. Most common are foreclosure properties, but houses might also be on the block because of unpaid property taxes or outstanding homeowner association (HOA) issues.
More rarely, a seller may just be looking to sell a home “as is.” In these cases, the seller wants to sell the house quickly and without the hassle of price negotiations.
How does the auction process work?
There are a few different types of auctions as well as different ways to bid on the properties, each with advantages and disadvantages. Auctions can occur live or online, with online becoming increasingly popular these days. This allows people to bid on properties virtually anywhere without relying on their local real estate market. The advantage and convenience of being able to place a bid before stepping on a plane or going into a meeting can’t be denied. Live auctions are always over on the day they occur, but expect an online auction to go on for days or even weeks.
Types of Auctions
Absolute auction:
Absolute auctions are your standard, live real estate auctions and bring to mind a crowd of people standing around on the courthouse steps, jostling for space, and raising little placards with numbers on them whenever they want to raise their bid. That’s not inaccurate. Like traditional auctions of other kinds, each bid must be higher than the previous one. The auction ends when the bidding ceases and the last and highest bidder wins the property.
If there’s a small turnout of bidders, a buyer often walks away with quite a steal on the property, acquiring a house for significantly less than market value. Conversely, these live auctions might attract a large crowd and the competition can be fierce. In that case, if you’re not careful, you could end up paying way too much for a house that’s in terrible shape.
Minimum bid auction:
This type of auction can be either live or online and is very simple. The seller sets a minimum bid amount they will accept for the property. If that bid isn’t reached, the auction is over and the house isn’t sold that day. In this instance, buyers may not be able to get as much of a bargain on a property as with an absolute auction with low attendance.
Reserve auction:
A reserve auction, also known as a lender confirmation auction, is essentially a combination of the absolute and the minimum bid auction. In this case, the seller sets a reserve (or minimum) bid and if that bid isn’t met, the seller may withdraw the property. The distinction here is that the seller may not reveal that reserve bid to buyers (in the hopes of getting a bigger sale). Instead, the seller has the option of accepting or rejecting the final bid, regardless of whether it met their minimum or not. This can be tricky for bidders because, if they’re not careful, they could end up paying a higher price than the seller will accept.
Types of bids
Open bids
Buyers live or online can place open bids, but these are more common at live auctions. These typically occur at an auction house, the county courthouse, or a conference room in a hotel or conference center.
No matter what you’ve seen in the movies, potential buyers can’t just go in, pick up a bidding paddle, and start shouting out numbers. First, the bidder must verify their identity, agree to the auction terms, and fill out the necessary paperwork. It’s recommended to arrive at least an hour before the beginning of a foreclosure auction.
Additionally, if applicable, you’ll need to prove you have authority over any legal entity that might take the title over the property. This is necessary, for example, if you are the agent acting on behalf of a holding company. Furthermore, you must provide a deposit to demonstrate serious intent, which will either be applied to the sale price or returned to the bidder if no purchase is made.
Blind bids
During blind bids, potential buyers have no idea what their competition is bidding, so this type of bid can be more beneficial to the seller and riskier to the buyer. In an online auction, it’s pretty simple to conceal bids. In live circumstances, potential buyers place bids by submitting a sealed document to the seller. This document contains the identity of the buyer, an agreement accepting the terms of the auction, and a deposit in most cases.
How to Buy a House at Auction
Step 1: Weigh the Risks and Rewards
As with most real estate sales, there are always risks and rewards. However, expect higher risks with auction properties.
Step 2: Where to Find Auction Properties
Several different places offer search options for foreclosure properties. You can look in the newspapers, check online property auctions, look for posts in public places like county courthouses, search government websites, or ask your local real estate agent.
Step 3: Ask the Experts
Experts are specialists for a reason and should be consulted on how to buy a house at auction. Their job is to know the market and they can be invaluable in your search for foreclosure sales.
For instance, real estate agents, appraisers, and contractors can all provide advice that will help you find, assess, and determine your purchase price limit in search of the winning bid. It’s also a good idea to get in touch with a real estate attorney to carry out a title search or look into title insurance. When buying a piece of real estate under these circumstances, you want as few surprises as possible, and the experts are available to navigate that process with you.
Step 4: Expect to Pay Cash
Because of the risks present, few lenders will finance an auction property (although some auction houses do have lenders onsite). With this in mind, expect to pay for your new home with cash in the form of a cashier’s check or check. This can be scary, even though you’re not paying the full market value in a foreclosure sale. However, that’s one of the many risks you take on as the winning bidder.
Furthermore, you must be prepared to pay immediately. Often in live real estate auctions, you will hand overpayment as soon as your bid is accepted or certainly within 24 hours. Occasionally, such as with online auctions, you might get a day or two to pay, but don’t expect any more than that. The bottom line: go into it with the expectation that you will pay the auction company that day.
Step 5: Confirm Auction Details
It’s common for real estate auctions to be postponed or canceled even on the day of the sale. While this isn’t much of a problem when bidding online, you don’t want to make a three-hour drive only to find out the real estate auction isn’t happening today.
Sometimes the seller cancels a live auction because the owner of the foreclosure property comes up with the money owed or got a loan modification. It’s also possible the borrower was able to sell the property as a short sale (more on that later.) Postponements are also common and happen because the proper documentation isn’t in place or the owner receives more time.
Step 6: Obtain Ownership of the Property
Unlike in a typical real estate transaction, once you’re the winning bidder, you can expect to take possession of the property almost immediately. You may even get access to the property that day. Or, if the previous owner still occupies the house, which is pretty common, you might have to wait until what is known as the redemption period is over. Many states have a redemption period, the period after an auction property sells when the previous owner can reclaim the house by paying off any delinquent mortgage payments or taxes. So remember not to put any money into the property until you obtain the title.
How much should I bid?
There’s no concrete number here, but this is where that team of experts you assembled will come in handy. In most cases, such as foreclosure auctions, you can’t view much more than the exterior of the property, so it can be difficult to determine what a fair price is. However, an experienced real estate agent, appraiser, or contractor should offer a clearer picture of the market value of a house and/or its potential resale value. This, at least, provides you a starting point to come up with your highest offer without overpaying.
Pro Tip!
Try and visit a few live auctions before you are ready to buy. This way you can get a feel for how real estate auctions work. Talk to the different players there if you can — auctioneers, employees, sellers, or bidders. Not everyone will want to give away their secrets, but you can certainly glean some tips and go into your first bidding war with a better base of knowledge.
Also, get on the internet and visit some online auction sites to get an idea of that type of venue. Many of these sites have a wealth of information free for you to review and better educate yourself about the real estate auction arena. As a bonus, online auction houses often walk you through the whole process.
What Bidders Need to Know
- Accessing a property. You probably won’t get inside the property until you’ve scored the winning bid. And once you have bought the house, it might still have occupants or even squatters.
- Property condition and inspections. You won’t be able to inspect an auction house until after you’ve bought it, so you’re taking the risk that the property might be in terrible shape.
- Payment options (plan ahead). Expect to pay cash with a bank check. Other options aren’t very feasible and increase your risks.
- Check for any claims or liens. Have a real estate attorney do a title search to look for liens or claims against the property, which you might end up being responsible for. You can also purchase title insurance to further protect yourself.
Should I buy a house at auction?
Alternative to Buying a House at Auction
If you still want a good deal on a house but aren’t comfortable with the risks of buying a house at auction, you might want to consider a short sale. Sellers will sometimes opt for a short sale, also known as a pre-foreclosure sale, because the negative impact on their credit rating is less than with a foreclosure. Put simply, the seller agrees to sell the home for less than is owed on the mortgage, which must be done with the approval of the mortgage lender. Then the lender, usually a bank, decides if they will forgive the deficiency or go after the seller for the balance of the mortgage. Some states require lenders to forgive the mortgage difference, so it’s something the seller should research before attempting a short sale.
Short sales are beneficial to the buyer because they can still buy a home for less than the market price. However, buyers in this case can inspect the property before committing, unlike buying a house at auction. There are still some risks, but being able to visit the property gives the buyer a much clearer picture of what they’re getting into.
Another option is to buy a bank-owned property, also known as real estate owned (REO). These houses didn’t get sold at auction, so they become part of a bank’s inventory and they usually get sold at a discount. Additionally, sales of this kind generally come with smaller down payments and lower interest rates. However, the transaction can drag on for a long time.
FAQs
How do you get a loan to buy a house at auction?
Some buyers will opt for a short-term, high-interest loan to buy a house. This option is more appropriate for investors who plan to flip the property in a relatively short amount of time. This type of loan doesn’t make sense for a buyer who plans to live on the property.
Another option is to pay cash for the place and then immediately refinance it. By refinancing and taking that equity out of the house, buyers pay back anyone who loaned money to buy the house, or for investors to use on another property. The problem with this scenario is securing the lending. To do this, you need an appraisal to pass the usual home inspections, which may be difficult if the house is in much worse shape than you expected.
How can I buy a house at auction with no money?
This is a risky proposition on top of an already risky situation, but it can be done. You could borrow money from friends or family, get a personal loan from a bank, or borrow from a hard money lender, who charges high-interest rates. Keep in mind that it’s hard to know exactly what you’re getting in an auction property, so think long and hard before trying these options.
Is it worth buying a house at auction?
It certainly can be. With a bit of luck and a lot of homework, you could find yourself in your dream house for a fraction of the price. And if you’re an experienced investor, you can flip houses regularly for some substantial profits.
Does the buyer or seller pay auction fees?
That depends. Often the buyer will pay a percentage of the purchase price (usually around 5%), but sometimes the bank or seller agrees to pay it from the sale proceeds. Be sure to know this beforehand so you’re prepared.
Do I need a check at the auction?
Yes. You’ll probably pay as soon as you win the house, so come prepared with a certified bank check. Personal checks are not an acceptable form of payment. While you can pay cash, it’s not a great idea to walk around with a giant wad of money.
What type of property is suitable for auction?
Any house in foreclosure for being delinquent on mortgage payments, property taxes, or HOA payments is suitable for auction. Sometimes you can find homes offered “as is” because the seller doesn’t want to negotiate and wants a quick sale. Technically, any house could be sold at auction, but the seller should expect to get a much lower price than selling through traditional channels.
What happens if you buy at an auction and can’t get finance?
Usually, bidders must pay a deposit upfront to show serious intent to buy. If you score the winning bid and you don’t have the money, you’ll likely forfeit the deposit and lose the house.
Happy hunting!
Key Takeaways
- Be prepared to pay cash on the spot.
- Enlist real estate agents, attorneys, and other experts to help.
- Realize that even with all your preparation, buying a house without an inspection is a pretty big risk.
- Remember that most of the time you can’t view the property before purchasing it, so you have no idea what shape it’s in.
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