Home buyers often ask is how do real estate auctions work? Buying a home at auction offers an exciting alternative to the traditional route – one that can be perfect for those who want to invest in real estate.
With both live auctions and online auctions, the opportunities for finding a promising investment have never been better.
Without a doubt, most people conjure up images in their mind of getting the deal of the century at an auction. While there is certainly the possibility of that happening, it is not always the case.
Of course, there is also the possibility of making a significant investment mistake, so it is essential to make sure you are prepared for the auction process.
Fortunately, it is easy to learn and approachable for just about anyone, as long as you move carefully and seek knowledgeable guidance when you need it.
The possibility of finding a solid long-term real estate investment at an auction is pretty good.
Be sure, however, that before jumping in you have a handle on how the auction process works.
The vast majority of homes sold at auction are foreclosures. Lenders want to get as much as they can for homes that borrowers have defaulted on, and auctions offer a convenient way to accomplish this goal.
They also offer careful investors opportunities to find great deals. Purchasing a home at auction, however, should come with quite a bit of due diligence. If you are considering buying a home at auction, there are a few things you should be aware of:
Although online auctions are increasing in popularity, live auctions are still very much a thing. Typically held in the county courthouse – although they can be held at any public location, like a hotel ballroom – live auctions require you to show up in person to make your bid. Quite often real estate auctions also take place right on the property.
They are open to anyone interested in attending, although you will need to register if you want to make a bid on a property. You will also need to demonstrate to the auction that you have the financial means to purchase a home – the full purchase price – before you can bid.
If you want to attend a live auction, make sure you:
Research the auction before visiting. Each auction will have its own set of rules and requirements that you need to adhere to. Although it is perfectly fine to just show up to live auction to check it out if you are planning on bidding you will need to complete a registration, which will include submitting financial documents. Real Estate auctions quite often are publicized in your local newspaper on multiple occasions.
Search for properties before you go to an auction. Finding the best deals is going to require going to different auctions. You can search foreclosure data for the area that you are interested in and determine which auction will be selling the property that you want.
A local Realtor can help with this process, although be aware that the agent is not allowed to make a commission on a live auction sale.
Some of the best resources for finding properties going to auction can found on sites like RealtyTrac. Foreclosure sales data sometimes is also available from the specific county either online or at the county courthouse, or from a third-party foreclosure sales agent, known as a “trustee.”
Zillow, unfortunately, publishes information through RealtyTrac on their website showing homes for sale when they are not. Most of these properties the owner has missed a couple of mortgage payments. Zillow treat’s these properties as if they have already been foreclosed on which is not the case.
Quite often the owner catches back up on their mortgage payments, and nothing ever happens with the property. It can be very misleading to consumers. You can learn more here about why some homes posted for sale on Zillow are not actually for sale.
Check out the property for yourself. You can’t go into a foreclosure property most of the time because they tend to be occupied. However, you can do a drive-by to get an idea of the state of the home.
Experienced investors will tell you that you can determine a lot about the state of a property by the way it looks on the outside. If it looks good, it probably is nice enough inside. If it looks terrible, it probably looks the same inside. Keep in mind you will be buying the home in as is condition.
Unlike a standard Real Estate transaction, everything is “buyer beware”. When buying a traditional non foreclosed property, the owner probably will have had some kind of history with the home. He or she might even let you in on any known issues. In a foreclosure, the lender has never occupied the property so more often than not they know very little about the structure and potential problems that may be lurking.
In many instances, the person being foreclosed on has lost their home because of financial difficulties and has not had the money to keep up with general maintenance.
There could be substantial issues with the house that are not readily apparent. It’s possible some of the more expensive components of a home such as plumbing, heating and electrical systems have damage.
I have witnessed plenty of foreclosed homes where the owner has taken out their anger on the property. I’ve been in a few foreclosures where the entire kitchen was removed! Vandals have also been known to strip entire homes of their copper plumbing.
Keep in mind disclosing the condition of a property and it’s know defects is not something the auctioneer or lender will be doing.
Nobody wants to find out the home they just bought at an auction is a real lemon!
Find out everything you can about the property. You can learn just about everything you need to know about a house before you buy it – you just have to put in the time and effort to do so. Learn about the estimated market value, the money owed by the borrower and any other pertinent facts.
Any liens could become your responsibility if you buy the home so it would be a good idea to have an attorney look into the possibility of liens before you bid.
Have an attorney do a title search. It is imperative that you hire an attorney to do a title search. By doing so, you will be able to discover if there are any other liabilities on the property. Any liens could become your responsibility if you buy the home. Things like unpaid real estate taxes, court judgments, or mechanic liens are all possible landmines.
The faster you evaluate the legal status of the property you are interested in the better as this will help determine if it is even worth it to put in an offer. The last thing you want to discover is you just bought a home for $400,000 but then find out there is $100,000 worth of liens on the property. In Washington State, you might be shocked to find that you've bought an auction property and it has a couple of thousand dollars worth of electrical bills that you are now responsible for.
Verify everything on the day of the auction. Live auctions can change at a moment’s notice. You may show up to find out the auction has been canceled due to the borrower paying the lender or the home being sold as a short sale. So be sure to check the details once more before you head to the auction.
Get your financing in place. Most foreclosure auctions accept cash, cashier’s checks, or a bank money order for payment. In the vast majority of states, you will have to pay in full immediately after the auction concludes. A few states will allow you to pay a percentage at the auction and the rest within a particular time frame.
County foreclosure auctions often require advance deposits. The deposit amounts on foreclosure auctions usually runs from 5% to 10% of the final bid amount of the property
Remember, the home is not yours until you have the certificate of title. It can be exhilarating to win your first live auction. After you brave the new environment, hold up your bidding card and discover you are the winner, it is easy to assume you have overcome all obstacles – but you haven’t.
Until you have the certificate of title, you can still lose the property. The owner could pay off the loan or file an objection to the sale. Be patient and wait for the title before you celebrate.
More and more investors are choosing online auctions merely because they make everything easier. You can bid from anywhere over a set time period, which could take days or weeks to finish. With online auctions, you can bid on a variety of properties, including bank owned properties, short sales, non-distressed homes and even commercial properties.
If you want to bid online:
Register for the auction. Like live auctions, you have to register before you are allowed to bid online. The majority of online auction sites will require you to show that you are serious about buying by requiring a refundable deposit. You give your credit card information and make a deposit that will be refunded if you do not win the auction.
Research the auction thoroughly. Online auctions make it easy for you to learn everything you need to learn about the properties you are interested in and the rules of the auction site you are using.
It will take some time, but go through all the documents available, so you get a clear understanding of the process and the properties. It is wise to go beyond what is provided by the site as well.
Consider hiring a Real Estate agent to help you research the property, including a title search. Online auctions allow Realtors to make a commission from the sale, so they are likely to be more motivated to assist you in your research.
Get your financial information together. Once you win the auction the process will go quickly, so you want to be prepared. Gather all the documentation for your purchase before you start bidding. The site will want to be able to quickly access your funds once you win, including an earnest money deposit – typically 5% of the purchase price of the home.
If you are bidding under a different entity, like a Limited Liability Corporation (LLC), make sure you have the necessary documents for that as well.
Get title insurance. Many of the properties sold through auction will have liens which could become your responsibility if you win the auction. To protect yourself it is advisable to have title insurance. If you do wind up with a property that has one or more liens, the title insurance will help protect you financially.
Work with a Realtor. Because online auctions allow Realtors to get paid for their services, it should be easy to find an experienced agent who will work with you during the auction process.
An agent that is familiar with the area you are buying can help you see your options clearly and avoid mistakes – saving you money and ensuring you get what you want out of your auction.
Other Important Information About Auctions/Foreclosures
Depending on where you are located there are different procedures for initiating a foreclosure auction. For example, in Massachusetts where I am located, the primary means of foreclosure is non-judicial (No court action). If the deed of trust, however, does not contain a power of sale language, (documentation in the mortgage that allows the mortgagee to sell the property) the lender may seek judicial foreclosure.
With judicial foreclosures, the foreclosing party files a lawsuit in the county where the property is located and requests that the court grant a judgment allowing the house to be sold to satisfy the debt.
Judicial foreclosures generally take longer than nonjudicial foreclosures, most of the time lasting from around six months to three years, depending on the state. Buyers of foreclosed properties should also understand the owner might not have to move out of the house right immediately after the foreclosure sale. Depending laws of the state in which the property is located, the homeowner may stay in the house until the court confirms the sale.
In some states, the homeowner has the right to live in the house even longer during what’s called the “redemption period.” (A redemption period is an amount of time when the foreclosed homeowner gets the right to redeem or repurchase the home after the foreclosure. Learn more about the foreclosure redemption period in this article from NOLO.
Buying a home at a foreclosure auction sounds like an exciting proposition on the surface, especially if you can land a great deal. Just don’t fool yourself into believing purchasing at auction doesn’t come without risks. Hopefully, the information provided has been enlightening, and you now know more about the auction process.
About the Author: The above Real Estate information on buying a home at auction was provided by Bill Gassett, a Nationally recognized leader in his field. The article has been adapted and edited by Scott Hollis a Managing Broker with John L Scott - Lacey. Scott can be reached via email at Scott.Hollis01@gmail.com or by phone at 360-701-9682. Scott has helped people move in and out of the South Puget Sound for the last 4+ Years.
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