Loading the player...

The traditional channels of searching real estate listings and working with real estate agents aren't the only way to acquire a property. Experienced real estate investors often purchase properties at auctions. But auctions aren't limited to professionals - novices have purchased their homes at auctions, too.

This article will explain the basics of residential property auctions so you can decide if this option might work for you, whether you want to live in the property or just invest in it. (Foreclosed homes may be financially appealing, but there are many obstacles to consider before buying. See Foreclose On High Housing Prices.)

IN PICTURES: 10 Habits Of Successful Real Estate Investors

How Do Properties End Up at Auction?
The two main types of property auctions are foreclosure auctions and tax lien auctions. Before a property reaches auction, several things have to happen.

First, the homeowner doesn't pay his mortgage for several months. Then, the bank files a notice of default with the county recorder. If the homeowner doesn't pay the balance owed or renegotiate the loan with the lender, the home can be put up for auction. The amount of time it takes from when the homeowner stops paying the mortgage to when the home actually ends up at auction varies, but can be anywhere from a few months to a year or more.

The other main way a home ends up at auction is when the owner doesn't pay property taxes or becomes severely delinquent on state or local income taxes. In these cases, it is the unpaid tax authority (not the bank) that seizes the property.

How Property Auctions Work
Auctions take place at local government courthouses and other locations chosen by auction companies, such as hotel conference rooms. Homes are also auctioned online. Foreclosure auctions are held by bank-hired trustees. Tax lien auctions are conducted by local sheriffs.

There are two types of property auctions. In a subject to lender confirmation auction, the lender doesn't have to accept your offer even if you are the highest bidder. In an absolute auction, the winning bid gets the property.

The starting price of the auction may be the balance remaining on the mortgage, or may be a lower amount designed to spur bidding. In the case of a foreclosure auction, the lender is not allowed to profit from the auction. Often, these properties are sold at a loss, but if there is a profit, it is supposed to go the homeowner after the mortgage and any other liens are paid.

What can potential bidders learn about auction properties before bidding? Some auction companies have open houses so potential bidders can walk through the properties ahead of time. Listings describing the properties to be auctioned are also available. These allow people to determine in advance which properties they wish to bid on and the maximum price they are willing to pay. Other times it is only possible to drive by and see the outside. To discover properties that will be auctioned off, potential buyers can check county recorder websites and foreclosure listing services.

As for payment, bidders should bring to the auction a cashier's check for the amount of money required by the auction holder. Winning bidders will pay any auction fees and/or bidding fees and put down an earnest money deposit on the property they are purchasing before leaving the auction site. The winners then go through escrow and closing just like with any other purchase. Bidders at property auctions are often real estate investors who can afford to pay cash, but for auctions that allow financing, it is best to get prequalified ahead of time. Some auction houses prefer that you work with their affiliated lenders and will have those lenders on site at the auction. (The best real estate investors all share these traits and practices. To learn more, check out 10 Habits Of Highly Effective Real Estate Investors.)

Why would anyone be interested in buying a property at auction? Auctions offer a first chance to snap up certain properties, so in theory, some of the best properties get purchased at auctions. Also, because of the extra risk involved and because fewer people may be interested in the property than if it were available through traditional channels, prices can be lower. Auction properties aren't always great deals, but the potential to get a great deal is such a big draw that, for many people, it compensates for the numerous potential drawbacks of buying an auction property.

Properties being auctioned off aren't necessarily hidden gems. If a property winds up at auction, it means the owner was having financial trouble, so the house may have deferred maintenance problems. It might even be completely trashed. Also, because of the financial situation the previous owner was in, there may be other liens against the home, like tax liens, contractor liens, or a second mortgage. Bidders can avoid this problem by working with an auction house to ensure that the property has clear titles.

Buying a property at auction often requires a lot of cash. Each auction company/county government has its own requirements for payment. You will need some amount of cash no matter what just to secure your bid. For example, you may need a cashier's check for the minimum bid amount of the property in which you are interested. Down payment amounts and methods of purchasing often depend on the property and the auction house. More or better financing options may be available by purchasing a bank-owned property the traditional way, instead of at an auction.

Even if you win the auction, in some cases, you will not be allowed to purchase the property. The bank doesn't have to accept the winning bid in subject to lender confirmation foreclosure auction. Similarly, the auction could have a hidden reserve price that sets the limit on the minimum acceptable price. Familiarize yourself with the auction terms ahead of time to avoid any unpleasant surprises.

Auction properties sometimes do not allow for a home inspection or even provide a view of the inside prior to the auction. If you can't afford the risk of buying a property in poor condition, stick with auctions that allow you to inspect the property before bidding. Without this information, it can be hard to know what you're getting into, what a property's repair costs will be, or the true value of property until you've become the new owner.

Also, in some cases, the (former) owner or a squatter will be occupying the property, meaning you will have to evict them - a process that can be unpleasant at best, and lengthy and expensive at worst. (Don't let a slow real estate market drag you down - steer clear of these pitfalls. Read 5 Mistakes Real Estate Investors Should Avoid.)

If you're interested in trying to pick up a bargain property at auction, there's a lot to learn. Auctions can be a riskier way to purchase a property than buying a property through a real estate agent, so it's important to be extremely well-educated about the process and about the properties you are interested in bidding on. Also, just because a home is for sale at auction doesn't mean that you'll be able to get it at a good price (or that the home is a good deal at any price - it could be a money pit!). But for savvy, intelligent and motivated individuals, property auctions are worth exploring as a way to pick up a home or an investment property on the cheap.

Related Articles
  1. Home & Auto

    Should You Buy A House At Auction?

    In theory, many of the best properties are auctioned. But auctioned properties aren’t always hidden gems.
  2. Wealth Management

    The Most Important Factors that Affect Mortgage Rates

    Discover what the most important factors are that affect mortgage interest rates. Factors range from inflation and economic growth to Federal Reserve activity, .
  3. Home & Auto

    7 Absolute No-Nos When Selling a Home

    Avoid these mistakes if you’re looking to make a quick and easy home sale.
  4. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  5. Credit & Loans

    HARP Loan Program: Help for Underwater Mortgages

    If you are underwater on your mortgage, this program may be just what you need to help build up equity in your home.
  6. Insurance

    6 Reasons To Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  7. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  8. Home & Auto

    9 Things You Need To Know About Homeowners' Associations

    Restrictive rules and high fees are just some of the things to watch out for before joining an HOA.
  9. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  10. Home & Auto

    Rent-To-Own Homes: How The Process Works

    Here's what to watch for when negotiating a contract for a rent-to-own home – and who is a good candidate for this option.
  1. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  2. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  3. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  4. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  5. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  6. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>
Trading Center