If you’ve ever been to a live auction, you know it’s easy to get swept up in the excitement. “I’ve got $150 from the gentleman in the fine blue suit coat. Do I hear $200? $200 … $200 from the gentleman in the dashing bow tie!”
Going a little high with bids may not break you when you’re looking at sports memorabilia at a charity auction. When you’re spending 10 or 20 times that amount to get a house at a real estate auction, it’s important to keep a cooler head. You’ve got a lot to think about, especially how you’re going to pay for this. It’s possible to buy an auction property with a mortgage, but there are a few things you need to consider.
Know the Rules of the Game
There are essentially three types of real estate auctions and you should know what you’re getting into before the bidding war starts:
- Absolute auction: In this type of auction, the seller is obligated to take the highest bid no matter what. Because the sale is guaranteed, this option tends to see the highest participation. There’s also the thrill of knowing you’re getting the home if you win, so the bids can go higher quite quickly.
- Minimum bid auction: This works just the way it sounds. Anyone who can pay above the minimum bid set by the seller can participate. This guarantees you’ll have to pay a certain amount, but it does cut down on competition.
- Reserve auction: In a reserve auction, you’re essentially competing against other bidders for the right to make an offer on the house. The seller is not obligated to let go of the house if they think the winning bid is too low. This is the most risky option for potential buyers because nothing is guaranteed.
Buying with a Mortgage
Often, by the time a house gets to auction, the seller is looking to get rid of it quickly. Because of this, there may not be time to get an appraisal and/or inspection by the time you have to close. If the seller is not willing to wait, you won’t be able to finance with a mortgage for the purchase because the lender won’t be able to have a value for the house.
If the seller does allow appraisals, they’ll probably require that you be preapproved for your financing so the deal doesn’t fall through at the last minute. This is also advantageous for you as the bidder because you know exactly how much you can afford to bid.
There’s another factor that comes up in all mortgage transactions, but is particularly something to be aware of in an auction environment where the price can rise quickly in the heat of competition. No matter how much you are preapproved for, if the appraisal comes in below the purchase price, you’ll have to bring the difference when you close the deal. Lenders cannot loan you more than the property is worth.
If the structure of the auction won’t allow for you to get a mortgage, you’ll have to look at other financing or cash. Just because you might have to spend a significant portion of your savings up front doesn’t mean you have to keep all of the money tied up in the house forever.
Perhaps you have the cash to just buy the house at auction. Having a mortgage has benefits, including the ability to free up cash you spent on the house for other purposes like investing or remodeling. Perhaps you like the idea of being able to deduct mortgage interest from your taxes. Delayed financing can give you that option.
Delayed financing could be an attractive option for auction buyers because you don’t have to spend six months on the title of a property before taking cash out, so you can free up your money more quickly. With that said, there are a few requirements you need to know about:
- The new mortgage can’t be for more than what you paid for the home in the original transaction, including the purchase price, closing costs, prepaid fees and any points
- There can’t be a mortgage on the property and you must have paid in cash
- You need to show documentation sourcing the funds used in the original purchase (e.g. personal loan documents)
- You can’t use the new delayed financing to pay back any gift money used for the original purchase
There may be different requirements based on the type of loan for which you’re applying. For example, FHA and VA loans don’t allow delayed financing.
Avoiding the Auction Block
If you don’t have the cash to pay up front and the rules of the auction make it impossible to get a mortgage, you’ll probably have to move on from that particular house. However, you may still be able to get good deals on bank-owned homes and short sales. In a short sale, the offer you give the seller is then approved by the seller’s current lender. This is a way for the mortgage company to recover some money if the current occupant can no longer make their payments.
Whether it’s a short sale or foreclosure, many of these properties are available through a traditional offer process where you’re able to get mortgage financing and an appraisal. You can also find available homes online.
Now that you know everything you need to be the big fish at the auction, feel free to go ahead and get a preapproval with Rocket MortgageSM by Quicken Loans. If you have any questions, leave them in the comments below.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.