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Real estate listing websites aren’t your only option when you’re searching for a house. You can also buy a home at auction.
Buying a house at auction can be a great way to get a deal on a home, but it poses challenges and risks. It’s important to fully understand real estate auctions before jumping in.
Here’s everything you need to know about buying a house at auction.
What does it mean to buy a house at auction?
In a real estate auction, people interested in buying a home come together in one place to offer the best price in a short time frame. It can be an exciting process: The auction is often conducted in public, where you can hear the other bids coming in and decide whether or not to top them. Auctions continue until only one buyer is left — generally, this person gets the home for the top bid.
But there are some significant challenges when buying a house this way. Home auctions often require you to have the entire purchase price available via cash, money order, or certified check. If you’re counting on a mortgage to finance your home, auctions might not be the way to go.
But don’t be discouraged: It’s possible to buy a house at auction with a mortgage. With Credible, you can compare mortgage rates from various lenders in minutes.
When you buy a home the traditional way, a seller sets a listing price and allows people to tour the property before sending in an offer. In a real estate auction, you generally don’t have the opportunity to do a home inspection or see the inside of the home in person before you put in your bid. This can be risky: While you can often drive by the home on the way to the auction to see the exterior, the interior of these homes can be in bad shape. If you’re on a tight budget and can’t set aside extra money to fix up the home you buy, you might want to sit the auction out.
Why do homes end up at auction?
The most common way homes end up at auction is through foreclosure. When a homeowner is unable to pay their mortgage, the lender goes through a legal process to reclaim possession. While foreclosures work differently depending on the state the home is in, this process typically ends with an auction. The home is sold to the highest bidder, and the proceeds pay the lender back.
Real estate auctions can also take place after a tax foreclosure. Local governments typically have the power to seize a person’s property and sell it if property taxes are unpaid. This follows a lengthy process similar to that of a traditional foreclosure. Tax lien foreclosures are the reason why most lenders require you to put property taxes in escrow as part of your monthly payment.
But not all real estate auctions result from these scenarios. Anyone is able to sell their home in an auction if they choose to do so. For example, builders will sometimes auction off homes in a new development to sell them more quickly. You may choose to sell a home at auction to avoid drawn-out negotiations and the endless showings that come with a traditional sale.
Where do auctions take place?
Foreclosure auctions often take place in person at the courthouse in the county where the home is being sold, either outside on the courthouse steps or inside. Some states allow counties to hold foreclosure auctions in a publicly accessible space, like a hotel ballroom.
Private auctions can take place at an auction company’s office. For a larger auction, the auction house may rent out a larger space. One of the key advantages of in-person auctions is their efficiency. You’ll know right away if you won the property you bid on. The relatively small pool of buyers also gives you the chance to score a good deal.
Both public and private auctions may take place online, over several days or weeks. You’ll register on the website holding the auction, and often pay a refundable deposit. At the end of the online auction period, the winning bidder is notified and completes the sale.
These auctions have the advantage of bringing in a larger group of buyers — not just people who can attend an auction in person at a certain time. There’s less of a chance of getting caught up in the excitement of a live auction and overplaying your hand. You may also have a bit more time to do some due diligence on the property you’re considering.
How to find real estate auctions
Most auctions are advertised weeks or months in advance to give you the chance to arrange to attend and secure the cash you’ll need to take part. Foreclosure auctions may be listed regularly in local newspapers or government websites. They may also go through local law firms, who list foreclosed auction properties on their sites.
Private auctions will generally be listed on the websites of the auction house running the sale. In addition, real estate agents may be able to direct you to an auction sale.
Sites like Auction.com and RealtyTrac.com bring in auction listings from different sources, making it easier to find auctions happening near you. Keep in mind, just because a home is listed for auction doesn’t mean the sale will actually take place. Most states allow homeowners to catch up on their payments or taxes within a certain period of time to avoid having their home sold at auction.
How do home auctions work?
Auctions are typically open to the public and free to attend, but you’ll generally have to register ahead of time if you want to bid. In a private auction, you may be given a bid number or paddle to use when putting in a bid.
There are three main types of auctions.
Absolute auction: In an absolute auction, the property is guaranteed to sell to the highest bidder — wherever that price ends up.
Minimum-bid auction: In these auctions, bidding starts at a price published ahead of time, and you can put in new bids on top of that. This reduces the risk to the seller, but may also discourage some buyers hoping for a deal.
Reserve auction: Reserve auctions allow the seller the choice to accept or reject the winning bid at the end of the auction. There’s no minimum price listed, so you can’t be sure that your offer will be accepted.
The style of bidding can be different as well.
Open bidding: These bids are made public, and you’ll know exactly where the bidding stands before putting in your offer. This is typically how things are done during live auctions, with an auctioneer conducting the proceedings. They may also be done online, with the website listing the current bid price.
Sealed bidding: These bids are done in private. The auction house may ask you to fill out a form with the highest price you’re willing to pay for the property. You aren’t able to see what other people are bidding, and the highest price at the end of the process wins.
Credible makes it easy to compare mortgage rates for the home you buy at auction.
How do I buy a house at auction?
The process varies depending on the type of auction and the state in which it’s held. But generally, these are the steps you’ll follow.
Find an auction near you. You can search the websites of your county’s tax office or sheriff’s office to find foreclosure auction listings, or use a site like Auction.com or RealtyTrac.com to locate an upcoming auction in your area.
Do your research. With the listing in hand, you’ll want to do as much research as possible, just as if you were buying the home the traditional way. Look into sales prices of comparable homes and determine a fair market price. Also research the terms of the auction, how it will be conducted, and how any liens on the property will be handled. You may want to bring in a real estate attorney to help.
Drive by the property if possible. Try not to rely exclusively on photos provided by the auction company. Drive by the property and gauge its condition. Remember, though, the home may be occupied, and trying to get inside may violate the law.
Register for the auction. Some auctions may allow you to simply show up, but many require you to preregister. Make sure you know the procedure and follow it to the letter.
Prepare your finances. Different auctions have different rules, so be sure you know how you’ll be required to pay if you’re the winning bidder. Some auctions require a minimum deposit at the time of the auction, giving you time to finance the rest. Others require you to pay the full amount at the close of the sale. You may need to bring cash, a money order, or a cashier’s check.
Bid at the auction. The auctioneer will likely go over how to submit a bid at the beginning of the auction. You may need to raise a paddle or something similar to signal that you’re bidding.
Receive your certificate of title. Just because you won the auction doesn’t mean you own the home right away. Some states have an “upset bid” period, where other higher bids may come in after the auction time. Some areas may also allow homeowners to save their home from the sale even after the auction is held. Sit tight until you get your certificate of title, proving you now own the home. This can take a few weeks.
Buy title insurance. Title insurance protects you against unknown liens on the property that threaten your ownership. This can be a bigger risk when buying a foreclosed home at auction.
If you plan to finance your new home, check out Credible to compare mortgage rates in minutes.
Pros of buying a house at auction
Buying a home at auction can give you some significant advantages.
You may get a great deal. Depending on the type of auction, you may be able to buy a house for well below market price.
You may face less competition. Fewer people search auction listings than traditional listing services. Due to the challenges posed by the auction process, the pool of buyers is likely to be smaller, meaning you’ll have less competition for the home you want.
There’s a fair process. You know going into an auction just how the sale will be conducted, and you know you’re on a level playing field with anybody else trying to buy the home.
You get a fast settlement. In an auction, you know exactly when the sale will be held and when the deal will close. You’ll avoid what can be a long, drawn-out process to buy a home the traditional way.
Cons of buying a house at auction
While auctions can get you great deals, there are also risks and downsides.
Homes may be sold “as-is.” Homes sold at auction are often sold “as-is,” meaning the seller won’t negotiate with you on repairs. You also might not get the chance to walk through the home before putting in your bid, so you could be in for a surprise once you get the title and walk through the front door.
You must have cash for the auction. You’ll need a sizable bank account to participate. You generally need to put down a cash deposit, and you may even have to pay the full purchase price at the close of the sale.
You may be tempted to bid above your budget. Auctions are designed to be exciting, and bidding wars can ensue. In the heat of the moment, you could get caught up and put in a bid that’s above your price range.
There can be issues with titles. Since many homes at auction are sold in distress, there can be liens, judgments, and other issues with the title that can put your new property at risk.
Should I buy a house at auction?
This decision really comes down to your individual financial situation and the opportunities that present themselves. If you decide to buy a house at auction, treat the process as seriously as you would if you were buying a home the traditional way. Do as much due diligence as you can, carefully researching the home you want to bid on. You don’t want to end up in a situation where you win a home and are caught unprepared.
Buying a home at auction may be a better idea for experienced real estate investors looking for a property to rent or flip. New homebuyers may want the more tried-and-true method for their first home.
About the author: Andrew Dunn is an award-winning mortgage and finance writer with a decade of experience in covering personal finance. He’s written for LendingTree, where he was previously managing editor for mortgage content, Credit Karma, Business North Carolina magazine and the Charlotte Observer. His work has been recognized by the Society of American Business Editors and Writers, and the N.C. Press Association.