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.)
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How Do Properties End Up at Auction?
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 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. However, do your research beforehand using a tool like a mortgage calculator to determine the interest rates available from competing lenders. This may give you some leverage when working with a bidder's lenders.
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.)
The Bottom Line
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.