Buying A House At Auction: A How-To Guide
If you’ve been trying to buy a home during the last few years, you know that it’s hard out there. Even as demand eases in the current rising interest rate environment, housing inventories are low, prices are high and even seasoned investors are having trouble finding bargains.
You may be thinking of stepping outside the traditional home buying process to find more house buying opportunities. One route you may be contemplating is buying a house through a real estate auction.
Let’s look at what it means to buy a house at auction, how the process works and the pros and cons of this tactic.
Should I Consider Buying A House At Auction?
Real estate auctions have long been the domain of experienced real estate investors. However, technology has made home auctions more accessible to everyone. With stiff competition in the real estate market, more and more home buyers are venturing into this arena to find a home to serve as a primary residence.
There are many benefits to buying a house at auction. You may discover a diamond in the rough – and often at a discount. You may face less competition at auction than you would by taking the traditional home buying route.
However, you’ll likely be going up against experienced investors, and there are more risks and fewer consumer protections available to buyers who buy a home at auction.
How Do Houses End Up At Auction?
A home can end up at auction for several reasons, but it’s usually because a homeowner experienced some financial difficulty. Most houses are sold at auction for one of these reasons:
- Money owed to the lender: A lender may put up a house for sale at auction to recoup the money the borrower owes them on the mortgage. A home may end up on the auction block due to foreclosure (when a lender repossesses a home) or with a short sale (when a lender allows a homeowner to sell their home at auction to avoid foreclosure).
- Money owed in property taxes: If a homeowner falls behind on their property taxes, their county or a local government office may put the property up for sale at auction.
- Quick sale: In highly competitive markets, motivated sellers – sellers who need to relocate fast, sell inherited property to cover other expenses, etc. – may sell their home quickly at auction with an iBuyer. An iBuyer buys homes quickly in cash and resells them at a profit.
How To Buy A House At Auction
Buying a house at auction can be a smart move, but it’s not the right choice for everyone. If you decide to try it, you should have a thorough understanding of how the process works.
1. Select A Property
Do your research before committing to a property. Look for auction listings and information on homes:
- Through tax sales advertised in your local newspaper
- Auction sale information posted at your county courthouse
- Through specialized subscription services that list properties coming up for auction
- By purchasing foreclosure lists and property data for an area
In some cases, you may be able to schedule a walk-through of a property before the auction. If a walk-through isn’t an option, try learning more by taking a close look at the house. Take care not to violate any trespassing laws. As long as you’re a legal distance away, you may be able to use binoculars to get a closer look at the property.
Look for signs of structural problems or other signs that the house may be more trouble than its price tag.
Consider working with a real estate attorney to research any potential issues with the home before you buy it.
2. Look Out For Liabilities
Before buying a home at auction, carefully look for signs that someone may be living in the home. In some states, there shouldn’t be, and it can be up to the new owner to evict previous homeowners, tenants or squatters. For most bidders, eviction proceedings are difficult, expensive and unpleasant. If you suspect someone is in the home and shouldn’t be, you may save yourself from an enormous headache by passing on the listing.
You should complete a title search on the home to see if it has any liens against it. Liens follow the property – not the property owner. If the previous owner didn’t pay their property taxes, or a third party put a lien on the home to settle an unpaid debt, you may get stuck owing the money.
3. Line Up Cash Or Financing
Most auctions require cash to purchase a home. You’ll need to get your financing together before the auction because there’s usually a tight turnaround time for payment. If you make the winning bid, the funds are typically due by the end of the day.
Most auctioneers require payment by verified funding sources, like a cashier’s check. If you owe excess funds, you may be able to make the payment within a few weeks of the sale.
4. 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.
5. Bid Carefully
On the day of the auction, you should attend with your funding in hand. If it’s an in-person auction, you’ll sign in with the auctioneer. 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. Keep your composure and bid responsibly. A house is a significant expense and a big responsibility – even if you buy one at a deep discount.
To give you a sense of how everything works, try attending a few other auctions ahead of time with no intention of bidding on anything.
6. Close The Deal
The auction takes place, and you walk away as the winning bidder. So, what happens next? Well, now it’s time to finalize the deal according to the auction house’s guidelines.
You’ll either pay the entire purchase price or make a deposit within 24 hours of the sale. Depending on the state you live in, you may obtain ownership of the property immediately.
Some states have something called a redemption period. It allows homeowners who lost their homes due to unpaid property taxes to buy back their homes within a certain period of time.
If the original homeowner redeems the home you purchased, your money will be refunded. Once the title is issued and recorded with the county, you’ll be the rightful owner of the property.
Types Of Auctions
There are several different ways to organize an auction. These are the most common types of auctions you’ll encounter.
In-Person Vs. Online Auction
Live, in-person auctions still happen. You should be able to find the rules governing the in-person auction online. In small towns or rural areas, you may need to visit an office to get a hard copy of an auction’s guidelines.
On most real estate auction websites, you must preregister and prequalify. Prequalification proves you’re a serious bidder with access to the funds to complete the transaction.
Online real estate auctions are much more accessible, which can be a double-edged sword for prospective bidders. On the one hand, it’s easier to access potential deals. And it allows online real estate auction newbies to watch and learn until they feel comfortable jumping in.
But because online auctions are so accessible, you’ll likely experience more competition, which can reduce the likelihood of finding a bargain.
Absolute Auction Vs. Minimum Bid Auction
These two types of auctions are based on the minimum amount required to participate.
- Absolute auction: With an absolute auction, the sale always goes to the highest bidder. And because the sale is guaranteed, absolute auctions typically 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 happen at different venues, including live events or on an online marketplace like eBay.
- Minimum bid auction: With a minimum bid auction, 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. Knowing there’s no chance you’ll pay less than the minimum can cut down on competition by separating serious investors from tire kickers.
Reserve Vs. No-Reserve Auction
A reserve auction means a seller only sells if the bid exceeds their minimum price. The reserve price is the minimum bid the seller is willing to accept for the property, and they aren’t required to disclose that information to potential bidders.
Bids below the reserve price can be entered, but the seller can reject all bids if they deem them too low. A no-reserve auction doesn’t allow a seller to reject any bid, no matter how low.
Open Vs. Blind Bidding
With open bidding, buyers can see each other’s bids and can decide whether to make a higher bid to top a more recent bid. With blind bidding, bidders submit their best bid, not knowing whether there are other bidders or what their bids are.
How To Buy A House At Auction Without Cash
In most cases, you need cash to buy a house at auction. And you may have sources of cash you haven’t considered. Let’s take a look at some sources of cash:
If you’re a homeowner, you may have enough home equity to take cash out of your home. With a cash-out refinance, you can access your available equity as a lump sum payment while refinancing your current mortgage into a new loan. If you refinance your mortgage without getting a better interest rate or you extend the term of your loan, you may pay more for your mortgage over the long term.
Home Equity Loans
A home equity loan is a second mortgage on your home. A home equity loan lets you tap into your equity without changing your mortgage. If you bought your home or refinanced when interest rates were lower, this may be a more attractive option than a cash-out refinance. For people who bought a home or refinanced a mortgage to take advantage of the historically low interest rates a few years back, a home equity loan is a much more attractive option than refinancing as interest rates rise.
Like a refinance, a home equity loan requires a new application, an appraisal and closing costs. The process can take over a month. Plan ahead so the money is available when you need it.
A personal loan is based exclusively on a borrower’s creditworthiness, and no property or asset is necessary to secure the loan. Personal loans have higher interest rates, but there are no closing costs, appraisals or other steps involved in the refinance process. As an added benefit, you won’t risk losing your home if you can’t repay the loan.
Several real estate crowdfunding sites allow people interested in passive real estate investment to invest in projects pitched by anyone seeking financing for their projects. As you build up a track record, you’ll have more success attracting investors.
What Are The Pros And Cons Of Buying A House At Auction?
Buying a home at auction can have major positives – and big risks. It’s good to know the pros and cons before you place a bid.
Depending on the level of competition you face, you may score a deep discount. Of course, if you’re not an investor, your primary motivation may not be the prospect of a bargain.
One person’s bargain may be another person’s money pit. Many investors are also contractors who can easily handle major home repairs. A fixer-upper may not be a bargain for first-time home buyers who may put all their cash into buying the home.
Right now, housing inventory is very low and prices remain high even as demand slowly cools. If you’re desperate to find an affordable home, expanding into auctions may help you find a place to call your own.
House Purchased As-Is
When you purchase a house at auction, you likely won’t have an opportunity to inspect the property, and there will be no opportunity to negotiate the price based on how much it will cost to make it livable. It’s understood that the house you’re buying at auction is being purchased as-is.
If you put all your money into buying the home, you may not have enough left to tackle substantial repairs. Because the previous owners no longer occupy these homes, there hasn’t been anyone around to keep up with routine maintenance, and there’s no one to negotiate repairs with.
No Consumer Protections
Significant consumer protections were built into the home buying process after the 2008 financial crisis. The Truth-In-Lending Act (TILA) requires disclosures throughout the process, stricter lending requirements that verify a borrower’s ability to repay and a clear definition of the role of real estate agents.
None of these protections apply in the auction process. Most of these regulations are imposed on lenders and agents, and they don’t play a role in the auction process.
Must Have Cash
Almost all auctions require bidders to prequalify, a process that helps ensure that, after winning the auction, a bidder can settle up on the property in cash within a given time, usually 48 – 72 hours.
Risk Of Overpaying
If you don’t do your due diligence or get caught up in the heat of the auction, there’s always a risk that you may overpay. And the risk can balloon if you’re not an experienced real estate investor or haven’t researched the home and determined its market value.
Previous Owners Can Reclaim Home
In some states, a previous owner can reclaim their home by catching up on their payments or working out a repayment plan with the lender. A possible scenario may be a previous owner losing their home because they lost their job but recently found work and can cover their missed payments and continue to pay their mortgage.
Until the title is yours, a previous owner may stop the sale. Check the laws in your state to avoid having to walk away from a property you were so close to owning.
Buying A House At Auction FAQs
Do you have more questions about buying a house at auction? We have some answers that can help shed more light on the process, but you should always consult with a real estate attorney before making any kind of purchase.
Can I get delayed financing for a home purchased at auction?
Delayed financing allows you to apply for a mortgage once you take ownership of a property. Homeowners usually wait 6 months before they can refinance their mortgage, but homeowners who purchase a home with cash can apply for what is essentially a first mortgage right away.
Our colleagues at Rocket Mortgage® offer delayed financing options.
Are there loans available to help you buy a house at auction without cash?
You may be able to use “hard cash” or hard money loans. The loans have high interest rates and short repayment terms. They’re best suited for experienced house flippers who know how to rehab a house fast and resell it quickly.
However, some states allow bidders time to complete the transaction with a mortgage. Check your state’s laws and the rules of the auction.
Why are houses up for auction so cheap?
Prices tend to reflect the degree of necessary repairs and the level of risk it creates. An extremely low opening bid amount and a lack of activity may signal that more experienced eyes have looked at the house and decided to pass. With more and more auctions online, major bargains may be harder to find.
The Bottom Line
You may find some attractive deals or at least additional housing inventory to consider if you opt for auctions. You can purchase auctioned homes at a discount, and you may face less competition. But you must understand the risks and know how to deal with them, which can be particularly difficult for first-time home buyers.
If you plan on participating in an auction that allows buyers to complete a purchase with financing, apply online today to start the initial approval process.