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Buying A House At Auction: Here’s How It Works

6-Minute Read
Published on December 11, 2020
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If you’re looking to buy a new house, then you’ve probably spent some time exploring online listings. And during this process, you stumbled upon some homes that are available through online or in-person auctions.

Many of these houses seem nice and are available at a price you can afford. But the deal almost seems too good to be true and you’re not sure how to proceed.

It’s possible to find a deal on a house at auction but you need to know what you’re doing. This article will explain how to buy a house at auction and offer some tips for getting started.

Why Buy A House At Auction?

There are many benefits to buying a house at auction. Most people pursue this option because there is the potential of finding a really great deal. You could find a nice home at a steep discount.

And when you buy a home at auction, you’ll face far less competition than you would by taking the traditional home buying route. However, you will likely be going up against experienced investors.

And there are risks to buying a home at auction. You’ll have limited knowledge about the property before buying it, so you may end up with problems you didn’t anticipate. So, it’s important to go into the auction well-informed so you don’t end up investing in a money pit.

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How Do Houses End Up At Auction?

There are many different reasons a home ends up at auction, but usually it’s because the homeowner started having financial problems. Most houses end up being sold at auction due to foreclosure and property tax default.

When a homeowner stops making payments on their mortgage, the lender has no choice but to foreclose on the property. And once the bank takes ownership of the home, it’s often sold at auction.

How Do House Auctions Work?

Auctions are not a one-size-fits-all process and there are several different types you want to know about. Let’s look at the most common types of auctions you’ll come across.

Absolute Auction

An absolute auction is a popular option for sellers who want a quick and simple real estate transaction. In this type of auction, the sale is always awarded to the highest bidder. And because the sale is guaranteed, absolute auctions tend to have a high level of participation.

There is no minimum floor at which the bidding must start, so the price always begins at $0. Absolute auctions can occur at many different types of venues, including live events or on an online marketplace like eBay.

Minimum Bid Auction

A minimum bid auction is exactly what it sounds like – there’s a minimum bid amount to get started. Anyone who can pay above the minimum bid set by the seller can participate. The downside is that you’re guaranteed to pay a certain amount, but it does cut down on competition.

Reserve Auction

A reserve auction will be the least competitive but there’s no guarantee you’ll win your bid on the property. In this type of auction, you’re essentially competing against other bidders for the right to make an offer on the house.

The reserve price is the minimum bid the seller is willing to accept for the property, and they are not required to disclose that information to potential buyers. And the seller is not obligated to let go of the house if they think the winning bid is too low.

Out of the three types of auctions you’ll find, a reserve auction is always going to be the riskiest. That’s because even if you win, your bid could ultimately be rejected by the seller.

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How To Buy A House At Auction

Buying a house at auction could be a smart move but it’s not the right choice for everyone. And if you decide to give it a try, you’ll need to have a thorough understanding of how the process works.

Weigh The Risks And Rewards

There are many potential benefits to buying a home at auction. For instance, you could buy a home at below market value and pay substantially less than you would’ve otherwise.

But you’re also taking on a certain amount of risk. You won’t be able to get a proper inspection before buying the home, so you could end up with property damage or problems you didn’t anticipate. You could also get stuck with back taxes that weren’t accounted for upfront.

And most likely, you’ll have to pay for the property in cash. Rarely will sellers accept financing for homes sold at auction.

Plus, there’s always the danger of potentially overpaying. This is an even bigger risk if you’re not an experienced real estate investor and haven’t researched the home and determined its market value.

Whether the potential gains outweigh the risks really depends on your personal situation. So be sure to account for these before moving forward with the auction.

Line Up Cash Or Financing

Most auctions require that you purchase the home in cash, so rarely can you take out a mortgage to buy the home. However, there are exceptions, so you’ll want to research the requirements ahead of time.

This means you’ll need to get your financing together before the auction takes place since there’s usually a tight turnaround time. If you end up placing the winning bid, those funds are typically due by the end of the day.

Most auctioneers will require payment by verified funding sources, like a cashier’s check. If you owe excess funds, those may be accepted within a few weeks of the sale.

Set A Budget

It’s important to set a budget before going to the auction. Otherwise, you may get caught up in the heat of the moment and end up overspending. Remember, the goal of buying a house at auction is to find a great deal.

Evaluate The Property

Evaluating the property can help you determine an appropriate budget for the home. That’s why it’s a good idea to assemble a team of experts to look at the current condition of the house.

For instance, a real estate agent may be able to schedule a tour of the property prior to the auction. This can help you determine the as-is value of the home and how much you can expect to spend on repairs.

If you can’t visit the home ahead of time, you should expect that some repairs will be necessary. And you should also do a lien search ahead of time, so you’ll know about any outstanding liens.

Bid Smartly

On the day of the auction, you should attend with the funding in hand. If it’s an in-person auction, you’ll sign in with the auctioneer and get situated. If you’re participating in an online auction, you may need to pay a deposit ahead of time.

Once the auction begins, it’s important to stay calm and not get caught up in the excitement. Keep your composure and bid responsibly. A house is still a significant expense and big responsibility, even if you do buy it at a deep discount.

If you can, try to attend a few other auctions ahead of time with no intention of bidding on anything. This will give you a sense of how everything works.

Close The Deal

The auction comes and goes and you walk away as the winning bidder. So, what happens next? Well, now it’s time to finalize the deal according to the guidelines set out by the auction house.

You’ll either pay the full purchase price or at least a deposit within 24 hours of the sale. And depending on the state you live in, you may be able to obtain ownership of the property immediately.

However, certain states do have something called a redemption period. This means that anyone who lost their home due to unpaid property taxes can buy it back within a certain period of time. 

So, if you purchase a home at auction that is later redeemed by the original homeowner, you’ll be refunded for your purchase. But once the title is issued and recorded with the county, you will be the rightful owner of that property.

The Bottom Line On Buying A House At Auction

If you’re looking to buy your next house or invest in rental property, buying a house at auction could be a great option for you. Auctioned homes can come with steep discounts and you’ll face less competition.

However, not every home that is auctioned off is going to be a good deal. It’s important to do your due diligence on that property ahead of time so you’ll know what you’re getting yourself into.

Auctions work best for individuals who familiarize themselves with how the process works. Work with a team of experts and find out what the fair market value is so you don’t end up overpaying.

Most auctions require cash payments, but some accept financing. If you’re a homebuyer that’s looking to secure financing, be sure to speak with a Home Loan Expert from Quicken Loans® today.

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Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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