Purchasing At An Auction

How Do Auctions Work?

There are many auction houses and each one has its own rules. There may be many auctions offered within the same auction house. They must be compliant with the laws of the state or municipality in which they are located. Before you place a bid, make sure you are familiar with the rules for the auction you are interested in.

Different Types Of Auctions

Online or in-person auctions can be organized in any of these three ways. Each auction may use one or more of these types depending on the property owner.

Absolute Auction

An absolute auction is where the highest bidder wins. You could bid $1 and win the house.

Absolute auctions attract more bidders than other types of auctions, as there is no minimum. This is the preferred method for most lenders and government agencies. All sales are final. Sellers cannot back out if they receive a bid that is too low.

Minimum Bid Auction

This auction requires that you bid a minimum amount. The minimum bid is announced in advance. If you're bidding in-person (more below), the auctioneer announces the minimum bid amount before the property opens for bidding. The minimum bid generally represents the mortgage balance in foreclosure cases or taxes due in the case of a tax lien. All sales made at the minimum or higher price are final.

Reserve Auction

In a reserve sale, bids are treated as offers. This means that the seller can accept, reject, or counteroffer the bid. In these situations, the seller may have a minimum offer in mind, but they don't want to share that amount in order to get more at auction. You may be rejected if your bid falls below the minimum amount that the seller wants.

In-Person Auction

A visit to an auction in person can feel like stepping back in history. It could be outside on the courthouse steps. The numbered cards can be lifted almost imperceptibly, but they are always visible and noted by an auctioneer. The bidders cover their eyes with sunglasses and hats in high-stakes poker to disguise any "tells" that could trigger emotional responses.

A first-time attendee to an auction might not be familiar with the process. Start attending auctions as soon as you plan to bid. You should collect all the sales materials and study the rules. This information is also available on the website. Do not go to auctions too early. Instead, plan to stay and ask questions to other bidders. You will soon feel the process and understand it.

Online Auction

Online auctions are becoming more popular.

This is a great advantage for first-time buyers since it's easier to gather all the information, ask any questions, and then just observe and learn. As each auction site is different, make sure you review the rules. You will need to preregister on most real-estate auction websites to prove your seriousness and prequalification. Do this before the house you are interested in goes up for bidding.

There will be more bidders due to increased accessibility. Prepare for stiffer competition.

Advantages Of Purchasing At Auction

Many books and workshops have been written about the advantages of purchasing properties via auction. It is possible to find a great deal.

 Because the lender wants to reduce their losses through the auction process by recouping the mortgage balance and costs of foreclosing. Lenders aren't interested in enriching sellers at auction. For municipalities with a tax lien, the same applies. They want to get the tax bill paid as quickly as possible and have their expenses recouped.

Disadvantages Of Purchasing At Auction

A lot of reasons exist why buying a house at an auction is a good option for real estate investors. It is also a unique way to purchase a home you can live in. Because the buyer is taking on significant risk, the house is often a bargain.

Properties are Sold As-Is

Homes for sale are sold as-is. This isn't unusual since many government-held properties are also sold this way. But it is extremely unlikely that you'll be able to get into a home being sold at auction. There is a possibility that the house may still be owned by the defaulting homeowner, tenants, or squatters. In this situation, "as-is", is closer to being "sight unseen".

It is possible to drive by a home but it is illegal and unsafe to enter or look into its windows. You may be able to find clues about the condition of the property by looking at it from the street or on the sidewalk if your skills are in-home improvements. If you are not experienced in home improvements, you will not be able to see what you're getting into when you bid.

Need Cash To Complete The Purchase

Most auctions have very strict rules on how you can pay. This includes cashier checks and cash. Auction properties are not eligible for financing. There are loans available. We will discuss these later. To bid on a property, you must prequalify. You need to prove that you have enough cash to pay the purchase price. Sometimes, this is done the same day as the auction.

This is why many buyers of auctioned-off property are real estate investors. They are usually backed by investors or they have set up their business to generate high cash reserves.

You'll Give Up Common Protections

Homebuyers are entitled to consumer protections in the vast majority of real estate transactions. Lenders must make a disclosure. Agents must advise you as they would. This does not apply to the auction situation.

Additionally, you will not have access to the home before you bid. You must also do your due diligence to ensure the title is clear and free of any legal liens. Although the mortgage lender and most likely the taxing authority may have liens in effect, you need to ensure there are not any other liens (e.g., a defaulted or unpaid homeowners' association dues). If you have any, you'll be responsible for paying them off when you get the title to your property.

After Succeeding At An Auction, The Home Might Be Returned To The Previous Owner

Even if your house is sold at auction, it's still possible to lose it. If the owner can't pay off their mortgage, works out a deal with the lender to forbear, or negotiates short sales, they will not be leaving empty-handed. You do not have any guarantees until you get the title that has your name on it. This typically takes about 10 business days.

Financing The Purchase Of A Property At Auction

Auctions are cash-intensive, but loans may be available for first-time investors.

Hard Cash Loans

These loans have a high-interest rate and are usually short-term. They are generally not appropriate for auction bidders who will live in the home. These loans are suitable for property flippers whose goal is to sell and fix up as many auctions buy as possible while paying the loan and taking home their profits.

Delayed Financing

You pay for your house upfront in a delayed finance loan. After that, you refinance the property to pull the equity out and buy more houses. This could work if the loan was secured by family members or friends and you need to repay them.

You will need to fulfill the appraisal and home inspection requirements. Much will depend on the condition of your home. If your home is in worse shape than you expected, it may be difficult to get financing.