It might seem like a good idea to buy a home at auction. But the truth is there are many obstacles to consider before taking this route.
Just because a house is for sale at auction doesn’t necessarily mean you’ll purchase it for a good price.
Just because a house is for sale at auction doesn’t necessarily mean you’ll purchase it for a good price.
You may have more would-be buyers showing up looking for the same good deal as you. Or companies that specialize in buying houses at auction, both of which can drive up the 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:
Then buying an auctioned home may be an acceptable risk. Here’s what you need to know.
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
The chief reasons a home ends up on the auction block is because the mortgage has not been paid, forcing a foreclosure. The bank then files a notice of default with the county or city recorder.
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.
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
Making a bid on a property is a risk! A bad purchase can haunt you for many years to come. That’s why you need to understand the rules of an auction going in.
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.
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.
Property Access
Unlike a traditional real estate sale, potential buyers are not permitted to walk through the property. Although, some suction houses do offer open houses.
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.
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
Remember, the home belonged to someone who could not afford to either pay the taxes or make the mortgage on it. That means the owner most likely could not afford to make routine maintenance repairs.
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.
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.
Home Inspection
What about a home inspection? Most are not allowed for auctioned properties. Even if you can get one, the utilities may be turned off so you can’t check for leaks, or if the appliances work, malfunctioning HVAC equipment, or electrical problems.
Get A Title Search
Before you place a bid, it’s wise to have a title search performed on the property. You’ll want to find out if there are any liens. If there are, and you become the new owner, those lien obligations pass to you.
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.
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.
Making Payment
If you’re buying a home at auction, you’ll need a lot of cash! Each auction company and local government has their own requirement for payment. As outlined above, you’ll definitely need cash just to secure your right to bid.
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:
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
In Conclusion
Lilly Title & Settlement is a woman-owned business in Staunton, VA. When you’re ready to close on your new real estate property, turn to us. We’ll make the closing process easy so that you get into your new home quickly!
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