How to buy a house at auction
The homes listed for sale on Zillow aren’t the only properties available. Sometimes houses are auctioned off due to foreclosure or other reasons. Buyers and investors can take advantage of these auction opportunities to buy a home, sometimes at a significant discount. However, they’re not always as easy to find as regular listings, and inexperience in the bidding and buying process can be a barrier to entry. Here’s what to know about buying a home at auction.
Why auctions happen
There are many reasons a home can go up for auction, but in many cases it is because the current owner of the property is in financial trouble. The most common reasons for an auction include foreclosure, non-payment of property taxes and outstanding issues with an association of owners.
“When a landlord doesn’t make regular payments to the lender, sometimes the lender has no choice but to foreclose on the property,” said Colby Hager, CEO of Capstone Home Buyers in San Antonio, Texas. “When that happens, the property is often put up for auction. “
In recent years, the seizure rate declined due to the strength of the economy and the labor market. This trend continued until 2020 – despite the economic turmoil of the pandemic – thanks to government measures. Once the moratorium is lifted, however, this drop in foreclosures is likely to be reversed.
How the auction process works
There are two main categories of real estate auctions: open and blind, explains John Castle, real estate investment agent at Keller Williams in Ottawa, Ontario, Canada.
“In an open auction, each bidder knows what the others are bidding,” Castle explains. “In a blind auction, the bidders don’t know. The two types of auctions [generally] have a reserve value ”, which is the minimum bid the seller will accept.
“Typically this amount is the debt owed to the entity that auctioned the property, such as the tax debt owed or the value of the loan on the property,” says Castle.
Open auctions can be conducted online or as a live auction, in person. With the latter, auctions often take place in an auction house, courthouse or town hall.
“In most open auction formats, each auction must be higher than the last auction and the auction ends when no participant bids higher than the most recent auction, or the auction may end. at a specific time, ”says Castle. “The highest bidder acquires the property.
This best bidder method can take place in a “minimum bid auction” as described, or in an “absolute bid”, which has no minimum bid, or a “reserve bid”, a combination of the two. . In a reserve auction, the seller sets a minimum bid, but if none of the bids meet that minimum, the seller can remove the property from the auction.
Since there are no set reserve prices, absolute auctions can take place even when there is only one buyer. In this case, without other competitors, the buyer could get the house for a good deal.
Before participating in an open auction, bidders must agree to the terms of the auction by completing the required documents or agreeing to an end-user license agreement, according to Castle.
Bidders should also verify their identity and demonstrate authority over any legal entity (such as an LLC or holding company) that will take title to the property, if any.
In addition, a deposit is often required before obtaining permission to participate in the auction.
In contrast, in a blind real estate auction, the identification of the bidder may be given to the party accepting the offer. A deposit is usually submitted with the bid along with an agreement accepting the terms of the auction – which are usually included in a sealed envelope.
“The auction can get very hectic,” Hager says. “There are usually multiple auctions going on simultaneously in a small area and often multiple bidders for each property. Auctioneers move quickly, so it can seem chaotic to anyone unfamiliar with the process.
Each foreclosure auction will have its own unique procedures, which may also vary depending on local and state laws.
How to buy a house at auction
1. Consider the rewards and the risks
The main advantage of buying a home at auction is the ability to buy a property for less than its market value. In other words: you might be able to get a good deal.
But there are also risks, says Suzanne Hollander, a lawyer and professor of real estate at Florida International University in Miami. These include:
- You generally cannot have the property professionally inspected, which could lead to surprises like squatters in possession, structural problems or physical damage to the residence.
- You usually have to pay all in cash; funded funds are almost always not accepted.
- It is your responsibility to exercise due diligence. This includes the investigation of current title and lien issues.
- You have to pay all back taxes in many jurisdictions. Additionally, if it is association accommodation, you may be liable for unpaid HOA fees.
Additionally, you may be overpaying for a property being auctioned, especially if you are inexperienced with property auctions and have not carefully researched the home and its value in advance.
2. Know where to look
You can find auction opportunities in local newspapers, online at auctioneer sites like Auction.com, and posted in public places like a county courthouse.
“In larger markets, many real estate investors subscribe to specialized subscription services that provide accurate information about properties that can be auctioned,” Hager explains.
Additionally, some investors buy foreclosure listings and property data to learn more about homes being auctioned.
3. Build a team of experts
Consult with an experienced real estate agent before the auction to determine an estimated market value and the likely price of the property. Your agent may also be able to obtain permission for you to view the property prior to the auction. (Castle notes that bidders are generally not allowed to walk through the house on the day of the auction.)
“A real estate attorney can also help you understand the terms of the auction,” says Castle. “Your lawyer may be able to perform a title search to make sure the property is free of liens and other charges that you may have to pay if you are the winning bidder.”
4. Bidding with money
In the majority of auctions, you cannot finance the purchase with a mortgage, so you must be prepared with the cash to bid.
“The most common rules are that you must do your due diligence before the auction, attend the auction with financing in hand, and often register with the auctioneer and receive a bidder number,” explains Hager.
If you ultimately have the winning auction, you will need to complete the paperwork and pay for the property immediately or within 24 hours.
“The money is due when the auction ends,” Hager says. “Most auctioneers accept payment from verified funding sources, such as cashier’s checks. Surplus funds paid to the auctioneer are usually returned to the buyer within two to six weeks.
5. Obtain ownership of the asset
If you are the winning bidder, depending on the circumstances of the auction and applicable laws, you may or may not have same day access to the home. It is possible that the foreclosed house, for example, will still be occupied by the defaulting borrower until the lender later takes possession of the property and title, which will then be transferred to you.
Be aware that, in some states, a homeowner who loses their property at auction for unpaid property taxes may buy back their home or repurchase it within a specific time frame known as a “buyback period” – “but that owner has to work with their home. local government agency that oversaw the overdue tax auction process in order to buy back this property, ”Hager said.
In this scenario, the delinquent owner is required to repay the balance of his taxes during a cancellation period, which can extend up to a year, according to Castle.
If you bought a home at auction that was then repurchased by the owner before the cancellation period ended, you’ll be refunded your full purchase price, according to Hager.
“A delinquent borrower who loses their home due to foreclosure can also participate in the auction,” Hager said. “However, if they have the funds to participate in the auction, it would have been more profitable to negotiate with the lender before the actual auction.”
Should you buy a house at auction?
Buying a home at auction can pay off a good deal if you do your homework and can bear the risks.
“You must know how to search for the title [and] make sure you buy a first position privilege, not a second-place privilege that could be erased, ”says Hollander. “Understand your obligations to pay cash and when, and realize that there are many risks involved. “
This is why auctions are often followed by real estate investors seeking to return a property and make a profit.
“It works well for people with a lot of experience or who are comfortable asking for help filling in a gap,” says Castle. “It also makes sense to go into the process with ample cash reserves, which will reduce the associated risks. “
An alternative could be to buy a property sold through a flash sale, which is usually accompanied by the right of inspection, a deed of guarantee and the peace of mind that the seller must pay all outstanding liens and taxes prior to closing.