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When most people think of buying a house, they picture browsing real estate listings online and touring a seller’s home with a real estate agent. However, there is another option: purchasing a home through an auction.
Real estate auctions are becoming more popular due in part to the current housing market. They may seem intimidating, but they’re not that different from other auctions.
Read our complete guide to buying a house at auction.
How Houses End Up at Auction
There are two main ways houses usually end up being offered for sale at auction: foreclosure and property tax default.
Foreclosure: When a homeowner defaults on the mortgage (they stop making payments), the lender will start the foreclosure process. If the homeowner isn’t able to make up their payments, the lender may seize the home and put it up for sale.
Property tax default: When the homeowner fails to pay property taxes, the taxing authority (usually the state or federal government) places a tax lien on the property. If the homeowner still doesn’t pay the taxes owed, the home can be sold at auction.
How Buying a House at Auction Works
Buying a house at auction typically works much like any auction: bidders place bids, and the highest bid wins. But sometimes, it isn’t so simple. Each type of auction works a little differently in how bids are made and what the minimum bid can be. And the exact rules vary with each auction company, and each state or municipality in which the auction is held.
Here are some of the real estate auction and bidding types you may encounter and how they work:
For the most part, real estate auctions can fall into three categories:
Absolute auction: This is how most of us imagine auctions to work. At an absolute auction, the item up for bid is awarded to the highest bidder.
Minimum bid auction: As the name suggests, the auctioneer sets the minimum bid for an item. If no one meets or exceeds the minimum, the property doesn’t sell.
Reserve auction: At a reserve auction, the seller sets a reserve price that is not made public. Bidders submit bids, and the highest bidder wins the auction if it meets the reserve price. If no one meets the reserve price, the property doesn’t sell.
Now that we know a bit about different types of auctions, let’s look at common bidding types:
Open bidding: Open bidding is the most straightforward type of bidding. Bidders raise their paddles to indicate interest, and the highest bidder wins.
Blind bidding: Blind bidding is when bidders write down their bids and submit them to the auctioneer. The highest bid wins the auction.
How To Find Auctions Near You
To find a real estate auction, do a quick online search for “real estate auctions” in the county you’re interested in, “real estate auctions near me” or “online real estate auctions.” You’ll likely come across several websites that list upcoming auctions in your area and online.
One leading home auction website is Auction.com. Their website has an extensive database of upcoming real estate auctions all over the country.
You can also check with your local county clerk’s or recorder’s office to see if they have any upcoming auctions.
Steps To Buying a House at Auction
Most people get a bit jittery about their first auction. To help calm any pre-auction nerves, you should know what to expect when you buy a house at auction.
Learn everything you can about the real estate auction process and the property you want ahead of time.
You typically won’t be able to inspect the property before the auction. But you can learn a lot about a property from the outside. Consider driving by the home and looking up old online listings.
The properties sold at auction are often distressed and require rehabilitation after the sale, so there is a good chance you might be purchasing a home with extensive – and expensive – damage.
You should connect with a real estate professional who can guide you through a title search and check for any claims against the property. It might also be helpful to learn how much the homeowner owed their creditor(s) and any other pertinent facts.
Register for the auction
To register for an auction and bid on a property, you’ll need to collect and have documentation ready, like proof of identity, address and funds. And you’ll probably need to register in advance.
Here are some of the documents you may need to provide:
- Proof of identity: Your driver’s license, passport or other government-issued identification. You’ll need to submit entity documents (such as articles of incorporation or organization) if you’re bidding under a company name.
- Proof of address: A recent utility bill or other documents that indicate your current address.
- Proof of funds: A bank statement, a letter from your banker or another document that proves you have the money to purchase the property.
- Refundable deposit: You’ll probably need to make a refundable deposit to attend the auction. The deposit usually equals 10% of the property’s potential purchase price, but the percentage could be lower or higher depending on the state.
Keep track of the auction’s date and time
Did you know live auctions can be canceled at a moment’s notice?
Most homes up for auction are sold due to unpaid property taxes. The auction will be canceled if the original owner works out an arrangement to repay the money they owe or performs a short sale.
Given the fluidity of the situation, it’s crucial to stay on top of any changes by frequently checking the auction website or contacting the auctioneer.
Attend the auction and place your bid
How you place a bid will differ slightly depending on the type of auction you attend.
You usually receive a paddle with your bidder number when you attend an auction in person. An auctioneer starts the bidding at a predetermined price and takes bids from the audience. When you want to make a bid, you raise your paddle. If you place the highest bid and win the auction, you’ll receive a certificate of sale.
But the deal isn’t done yet.
To finalize the deal, you’ll need to receive the certificate of title from the seller proving who the owner is and if there are liens or other claims against the property. With the certificate of title in hand, you can buy title insurance to protect yourself in case there are any undiscovered claims against the property.
While online real estate auctions work the same way (though you should familiarize yourself with their requirements before you make your first bid), there are some key differences.
First, you can attend an auction from the comfort of your home or your favorite coffee shop. And online auctions can last for several days. They don’t end just because bidding has stopped.
Make sure you know how to make payments if you win an online auction. Payments are typically due 24 – 48 hours after the auction closes.
How To Pay for an Auction Home
In most cases, the winning bidder must make a deposit that is typically 10% of the final purchase price immediately after the auction, and the rest is due within 30 days.
You can pay the remaining balance with cash, certified funds or bank financing. Cash is the simplest option, but it may not be feasible for all buyers. Certified funds are typically money orders or cashier’s checks issued by a bank or other financial institution. And bank financing may be another option.
Bidding with cash
While you’ll likely pay your earnest money deposit with cash or certified funds, it isn’t always possible to pay your remaining balance with cash.
When an auction allows financing, traditional lenders often cannot issue a loan for a home sold at auction quickly enough to make it a viable funding source. Many borrowers will either tap into cash reserves or take out a hard money loan.
While they are an option, you should treat hard money loans with extreme caution. Hard money loans are short-term loans with interest rates that can be two to three times higher than traditional loans and have higher fees. They should only be used as a last resort because you could risk losing the property and destroying your credit if you can’t repay the loan in time.
Pros and Cons of Buying a House at Auction
Like any major purchase, buying a house at auction has major pros and cons.
When a lender or tax authority puts a home up for auction, they’re usually looking to cut their losses and recover the remaining balance, which usually translates to a discounted house.
Typically, there will be far fewer bidders at an auction than there would be if the same property were sold through a traditional real estate agent. This is especially true in a seller’s market.
With very few exceptions, homes at auction are sold as is. There are no opportunities for inspections or repairs.
To bid on a house at an auction, you must prove you have the money to pay for it right away. You’ll typically bring the earnest money deposit in cash or certified funds when you register. If you win, you’ll need to pay the remaining balance in 30 days, so you’ll need access to cash to complete the transaction.
Going Once, Going Twice … Sold
Real estate auctions can be an exciting way to get a great deal on a property. But they’re not for everyone. Before you start bidding, make sure you understand the process and that you’re taking on some risks. With a little research and prep work, you could become the proud owner of a new home for less!