Buying a house at auction could be a great opportunity to scoop up a deal on a property. When homes are auctioned off, either due to foreclosure or other reasons, the highest bidder gets the property. Once the property is yours, you could move in, rent it out, or fix and flip it.
How does a house auction work? In terms of the mechanics, they’re not that different from other types of auctions. If you’ve ever been to an estate auction or charity auction, for example, then you might already have an idea of what to expect. But the dollar amounts are likely higher than you would encounter in a typical auction, so if you’re considering buying a house at auction, it’s wise to study the landscape before you start. Here’s what you need to know.
What Are House Auctions?
An auction is a sale that’s open to the public in which something is sold to the highest bidder. House auctions are regulated by state laws. An auction house or company can run the auction on behalf of whoever owns the home, which may be a bank, lender, or individual. How does an auction house work? Auction companies typically get a share of the sale proceeds in exchange for running the auction.
Real estate auctions can save buyers the time and stress of house-hunting for weeks or months on end. If you’re paying cash for the home — and most auction winners do — you don’t have to go through the home mortgage loan process either.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
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Why Are Some Houses Sold at Auction?
There are different reasons why a home may be sold at auction, but it’s often due to financial hardship on the part of the owner. For example, a home could be auctioned for sale if the owner:
• Defaulted on the mortgage payments and the home is in foreclosure
• Agreed to a short sale with the bank in order to avoid foreclosure
• Failed to make property tax payments
• Had their property seized as part of a government forfeiture
• Didn’t pay homeowners association fees as agreed
In other instances, a homeowner may decide to put a property up for auction simply to unload it quickly. If someone inherits a home, for instance, they might decide to auction it off so they can walk away with cash in hand rather than listing the property on the market and waiting for it to sell.
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How Do Auctions Work?
How does an auction work for a house? It’s not that different from any other type of auction. The auction company can announce the date and time of the auction beforehand, giving prospective bidders a chance to research the details of the property. People place bids on the property, either in person or online, by a prearranged deadline, and the person submitting the highest bid wins.
Types of Auctions
House auctions can be absolute, minimum bid, or reserve. How the auction is structured can depend on the seller’s preferences. Here’s how each type of auction works.
• Absolute auction. In an absolute auction, the property is sold to the highest bidder. Unless there are no bidders at all, a sale is guaranteed.
• Minimum bid auction. In a minimum bid auction, the auction company sets a minimum bid amount. Bidders must then submit starting bids that are equal to or above that amount.
• Reserve auction. In this scenario, a minimum bid is not published but the seller reserves the right to reject any bids that don’t meet their reserve price — sometimes as much as several days after the auction concludes. This means there is no guarantee that the property will actually be sold, even to the highest bidder.
House auctions can be held online or in person. The format may depend on the auction house or again, the seller’s preferences.
Most auctions, including house auctions, also involve a buyer’s premium in addition to the so-called “hammer price” (the winning bid). The buyer’s premium is typically a percentage of the hammer price, usually under 10%. The premium is not part of your bid, but you should know what it is and factor that into your overall budget for bidding so that you don’t exceed your resources.
Types of Bids
In addition to there being different types of house auctions, there can also be different types of bids. The seller has the option to choose whether they’d like bids to be blind or open.
• Blind bids. In a blind bid auction, bids are not disclosed. In other words, you won’t know what the person next to you is bidding. This type of bidding requires buyers to be able to make an educated guess in order to avoid overpaying for a property.
• Open bids. In an open bid auction, bidders can see what price everyone else is offering for a property. This type of arrangement offers transparency and makes it less likely that you’ll overbid, however, it can lead to a bidding war if there’s a lot of competition for a property.
If you’re researching how buying a house at auction works, it’s important to know which type of bid arrangement the auction house uses beforehand. Otherwise, you could end up in a situation where bidding gets tricky and you risk going over budget or losing the property.
How Much Should I Bid?
There is no simple answer to this question, as the amount you’ll need to bid to win a house at auction can depend on the terms of the auction itself. If you’re in a minimum bid auction, for instance, then you’ll need to bid at least enough to meet the seller’s base requirements. However, you may need to bid well above the minimum to win the auction.
Doing your research before auction day can help you get a better idea of how much to bid on a house at auction. If you know, for example, that there’s still $100,000 remaining on the mortgage of a foreclosed home then you might set that amount as your maximum bid if there is no minimum.
However, you’d also want to know what the home is worth. If the property’s appraised value is only $70,000, then you’d likely want to adjust your maximum bid down. The more you know about the property, the easier it becomes to establish your minimum and maximum thresholds for bidding.
Example of a House Auction
How does buying a house at auction work in real life? Again, it can depend on several factors, including the state the auction is being held in, the auction company that’s being used, the seller’s preferences, and the home itself. Here’s an example of what an absolute, open-bid auction might look like.
You, along with other prospective buyers, are bidding on a home with no minimum. You know from your research that the property has an appraised value of $80,000 so you decide your maximum bid will be $70,000. Another buyer makes an opening bid of $30,000, which is followed by bids of $35,000, $42,000, $53,000, and $60,000 from the remaining bidders.
At this point, you decide to bid $63,000, which is still under your maximum bid threshold. As the auction continues, buyers one and two stop making new bids. Buyer three counters with $65,000 and you bid $67,000. Buyer three bumps their bid to $69,000, which prompts you to go to $70,000.
If there are no more bids, then you win the property and move on to the next step, which is to arrange payment with the auction company. If buyer three counters with $72,000, you’d need to decide if you want to go above your maximum bid or let the property go.
Buying a House at Auction: In Person vs. Online
Auction companies can host home auctions in person or online. The process is still largely the same, though there are some differences to know.
In Person
At an in-person auction, you and other interested bidders will meet at an appointed date, time, and place to make your bids. An auctioneer will run the auction and accept bids, according to the seller’s preferences. Should you win an in-person home auction, you’ll need to make arrangements for payment that day.
Attending an in-person auction can be more stressful if you’re in an open bidding situation and it starts to get competitive. You might be driven by emotion to make a bid that you otherwise wouldn’t if you felt less pressure to secure a particular property.
Online
Online house auctions also require you to show up at an appointed day and time to place your bids but you’re able to do it from the comfort of home or wherever you happen to be at the moment, as long as you have a strong internet connection. You and other buyers can make bids on the property and again, the winner gets the home.
Buying a house at auction online may be more convenient if you’re not able to go to the auction site in person. You could bid on homes on your lunch break at work or while you’re waiting in the carpool line to pick up kids from school. You may feel less pressure since you’re not surrounded by other eager buyers shouting out bids.
How to Find Real Estate Auctions
There are several ways to find real estate auctions near you, starting with an online search. You can visit real estate auction websites and filter for properties near you by your current location. Auction websites may also allow you to filter by property type or opening bid so you can narrow down your search to find properties that fit your budget. The number of properties available is driven in part by foreclosure rates in each state.
You can also look for home auctions near you using other means, including:
• Craigslist
• Local newspaper advertisements
• County treasurer or tax assessment notices online
• County court websites
If you know a local real estate agent, you might also contact them to ask if they know of any upcoming property auctions. Finally, you can ask around with friends, family, or coworkers to see if anyone in your circle has a lead on a home that may be going up for auction.
What Bidders Need to Know
Before buying a house at auction, there are a few rules to be aware of. If you’re a first-time homebuyer or investor, here’s what you’ll need to know.
• You don’t need a real estate agent to buy a house at auction, though it might be helpful to talk to one informally about how the auction works or the details of a home you’re interested in.
• Houses sold at auction are usually as-is, meaning that if you buy a home that needs repairs, you’re responsible for making them.
• Depending on the reason for the auction and who the seller is, you may not be able to get a full home inspection (or any inspection) before buying.
• You may need to bring cash to the auction house to make a down payment or pay in full for any properties you win.
• If you’d like to attend a house auction online, you may first need to demonstrate to the auction company that you’re a qualified, legitimate buyer.
• Failing to follow through on the purchase after winning can result in the loss of any down payment or deposit you’ve made and you could also be barred from participating in future auctions.
It’s usually a good idea to read through the auction company’s policies beforehand so you know what obligations you have in attending the auction and if you win a bid.
Pros and Cons of Real Estate Auctions
Should you buy a house at auction? There are some advantages and disadvantages involved. On the pro side, you could buy a home for much less than what you could purchase one for on the open market. Homes that sell at auction may sell for below their appraised value, which could make it easier to find a bargain on a property. That might appeal to you if home prices are where you live have put home buying out of reach.
How much money you can save when buying a house at auction can depend on how motivated the seller is to get rid of it as well as the overall demand for properties in that area. When you compare the cost of living by state, the cost of living in California is much higher than other areas, largely because of how competitive the housing market is.
In terms of the downsides, most homes at auction are sold as-is. You run the risk of buying a home that looks like a great deal on paper, only to find out that it needs extensive repairs in order for it to be livable. If you’re trying to make some quick money with a fix and flip investment, for example, the final profit may fall short of your goals.
Another concern is ensuring a clear title on the property, particularly if it is in foreclosure or bank-owned. Order a title report on the property and look for secondary mortgage or tax liens. Sometimes the auction agreement will make the buyer responsible for these costs, so it’s a good idea to read the agreement carefully and to buy title insurance as well.
Unless the auction house offers a financing option, you’ll need to have cash on hand to complete the purchase. Coming up with tens of thousands of dollars to buy a home in cash may not be realistic for the average buyer. Last but not least, house auctions aren’t guaranteed. You’ll still need to go through escrow and closing on the property and, during that time, if the original homeowner is able to work out an agreement with the lender or bank that allows them to keep the home, your efforts to try to buy it could come to nothing. Think of winning a house auction as winning the right to buy the house, not winning the house itself.
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Tips to Buying Auction Homes
If you’re interested in how to buy a foreclosed home or bank-owned property at auction, it pays to do your research as mentioned. For example, you might ask these questions before the auction.
• Why is the home being sold?
• Is it a foreclosure or bank-owned?
• Will I be able to inspect the property beforehand or is it being sold as-is?
• What type of auction is it and are bids open or blind?
• How much cash will I need to bring? How much would I need to have easily at hand in the event that I have the winning bid?
• Does the auction house allow financing?
• What happens if the owner is able to reclaim the property?
The other tip to keep in mind is to know what you can comfortably bid, based on your budget. A real estate agent can also give you some valuable insight into the condition of the local housing market, which may make it easier to identify a good or bad buy.
If you go into a house auction without a firm limit set, it’s easy to go over budget and potentially end up paying too much for a property.
Risks of Buying Houses at House Auctions
House auctions are not risk-free, as you’re not always guaranteed total transparency. Some of the biggest risks to be aware of include:
• Buying a home as-is, only to find out it needs a lot of work to make it livable. Big-ticket problems that may not be immediately visible might include mold, a defective septic system, or electrical problems.
• Getting caught in a bidding war and paying too much for a property
• Tying up all of your cash in an investment property that may take months to become profitable
• Having your bid superseded if the homeowner is able to work out a last-minute agreement with the bank or lender
Being aware of the risks can help you to decide if buying a house at auction is right for you. And remember that there are other ways to invest in property, without having to own it directly. For example, you might collect dividends from a real estate investment trust (REIT), hold real estate mutual funds or exchange-traded funds (ETFs) in your brokerage account, or buy property alongside other investors through a real estate crowdfunding platform. If you are open to investing in commercial real estate, real estate options contracts are, well, another option.
The Takeaway
If you’re interested in how to buy a house on auction for yourself, it’s important to know what the risks are and what the process involves. At the end of the day, you might find that it’s easier to go the traditional route for buying a home.
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FAQ
What are the advantages of buying a house on auction?
Buying a house at auction could save you money if you’re able to pay less for a property than you would on the open market. Home auctions can offer opportunities for investors or would-be first-time buyers to save money on the purchase of a property.
What is the benefit of an auction house?
Houses sold at auction can be more affordable than homes sold on the open market. That’s an advantage if you’d like to buy a home, either to live in or as an investment property, but high prices are keeping you out of the housing market.
What happens when you bid at an auction?
When you make a bid on a house at auction, your bid can be topped by another prospective buyer or accepted if it’s the highest bid. If you make a winning bid, then you can move to the next phase, which involves signing the necessary paperwork and arranging payment to assume ownership of the home. \
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