Before bidding at a real estate auction, you need to understand the risk you’re taking. A bad purchase could haunt you for years. You also need to understand the auction’s rules and be prepared to follow them before trying to participate.
You will have to register and submit a refundable deposit of 5% to 10% of the property’s expected selling price to the entity holding the auction. If the auction is happening in person, be sure to check in at least an hour before the scheduled start and get the official card you’ll raise when you’re ready to bid.
See Also: Should You Buy a House at Auction?
Winning a property can work in two different ways.
- In a lender confirmation auction, the lender does not 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 may be the balance owed on the mortgage or a lower amount designed to spur bidding. In a foreclosure auction, the lender is not allowed to profit from the auction.
Often, these properties are sold at a loss; if there is a profit, it is supposed to go to the foreclosed homeowner after the mortgage and any other liens are paid.
Auction properties aren’t always great deals—for example, the auctioneer could set a hidden reserve price on a property, which is the minimum that must be bid.
As a buyer, you must keep in mind that there is a threshold price for every property where a wise purchase can become a foolish purchase. You must not allow your emotions to sway their decision.
The Problem of Accessing a Property
Auction properties rarely provide potential buyers at the same level of access that traditionally sold properties do. You probably won’t be able to walk through the property with your agent at your convenience, though some auction companies do offer open houses.
Either you or your trusted investment team should thoroughly evaluate both the real estate you are considering and the people you are dealing with before obligating yourself legally or financially.
Similarly, sources that report on the current or future value of a property can be very inaccurate unless there has been an onsite evaluation by professionals who know how to gather and assess all the necessary details.
The best way to assess an auction property is to work with pros—real estate agents, appraisers, and contractors—who understand construction and remodelling costs and who can accurately assess the property’s current and future value and the cost of the work it needs.
Payment Options: Plan Ahead
Buying a property at auction usually requires a lot of cash. Each auction company and county government has its own requirements for payment, but you will probably need cash just to secure your right to bid.
Down payment amounts and methods of purchasing often depend on the property and the auction house. More flexible financing options may be available by purchasing a bank-owned property the traditional way: Auctions are not the only way to buy foreclosures.
As for payment, bidders should bring cash, a money order, or a cashier’s check for the sum required by the auction holder. Typically, you will have to pay for the property in full immediately after winning the auction. Occasionally, you may have until the next day to complete payment.
Failure to complete the payment may result in forfeiting your deposit and being banned from future auctions. Be prepared to provide proof of funds to show you’re able to complete the purchase. If you’re bidding as an entity, such as a trust, or limited partnership instead of as an individual, you may need to show your entity documents.
Winners go through escrow and closing just as they would with any other home purchase. Bidders at property auctions are often real estate investors who can afford to pay cash. For auctions that allow financed purchases, you’ll need to get prequalified ahead of time.
In conclusion:
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 to determine the interest rates available from competing lenders. This information may give you some leverage.
Also, be sure that you understand the auction fees you will be expected to cover. Homes purchased at auctions many times have costs and fees from auctioneers, banks, attorneys, and other companies required to bring the property to the auction.
It is not uncommon to find 10% auction fees, bank interest and penalties, attorney fees, 12% sale carrying fees, property preparation fees, and the like that are passed on to the buyer.
Note: The article is based on research and does not reflect the author’s or company’s opinions. We recommend you do your own research.
