Just because a house is for sale at auction doesn’t necessarily mean you’ll purchase it for a good price.
A risky process, taking the traditional path to homeownership—buying through a real estate agent—is a more secure path with profitable results over time.
However, if a buyer:
- Is well educated in how the real estate auction process works
- Has a real estate attorney to make sense of the paperwork
- Has the funds to pay upfront
Then buying an auctioned home may be an acceptable risk. Here’s what you need to know.
Why a Home Ends Up at Auction
If the balance is not paid by the mortgagee, or if a renegotiation by the lender cannot be obtained, then the lender can force the homeowner off the premises and put the home up for auction.
Another way that a home ends up at auction is due to a default in the payment of property taxes. In this case, it is the tax authority that seizes the property which results in a lien on the property.
Rules About Bidding at an Auction
For starters, you will have to register and submit a refundable deposit of between 5%-10% of the property’s expected selling price. This is submitted to the entity that is holding the auction.
Next, the starting price can be the balanced owed on the mortgage or it can be a lower amount designed to spur bidding. With a foreclosure auction, by law the lender is not allowed to make a profit.
If there is a profit, it goes to the homeowner after liens and the mortgage balance is paid. Lenders are not allowed to make a profit from a foreclosure.
Bear in mind, auction properties are not always a good deal as auctioneers can set a hidden reserve price. This is a minimum price that must be bid.
As for winning a bid at auction, the outcome works two ways. First, in a lender confirmation auction, even if you are the highest bidder, the lender does not have to accept your offer.
In an absolute auction, the winning bid is the final say and gets the property.
So what’s the best way to gauge the property’s value? Work with real estate pros, agents, appraisers, and contractors. They understand remodeling and construction costs and can give an accurate assessment of the property’s current value, its future value, and the costs to renovate.
A Property's Condition
There’s also the likelihood of intentional damage. Once a homeowner learns her house has been repossessed, it’s possible further damage could be incurred.
If the home has been vacant for some time, it could also have been vandalized or occupied by squatters. All of these possibilities are unknowable until you get inside.
So, the best bet is to assume that if the house looks bad on the outside, it most likely looks bad on the inside.
Get A Title Search
Possible liens include contractor liens, tax liens, and a second mortgage. Here at Lilly Title & Settlement, we perform that work every day! It’s our job to make sure properties purchased have a clear title.
If yours is the winning bid at auction, it’s highly recommended to buy title insurance. Do this during escrow or immediately following the sale to protect yourself against any liens that did not show up during the title search.
Lastly, don’t do anything to the property until you have obtained the certificate of title. Legally, the property is not officially yours until you receive a certificate of title. This usually takes about 10 days to secure.
Auction bidders should bring cash, a money order, or a cashier’s check for the amount the auction holder requires.
Usually, you pay for the property in full after winning the bid. You must provide proof of funds to show that you can make the required payment in full.
Failure to make payment can result in the forfeiture of your deposit and even get you banned from future auctions.
Be aware of the auction fees you are expected to cover such as:
- A 10% auction fee
- Bank interest and penalties
- Attorney fees
- 12% sale carrying fees
- Property preparation fees