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Real estate auctions can be a great way to get a good deal on a home, but there are risks to consider. (iStock)
When it’s a seller’s market and competition among buyers is fierce, homebuyers may be looking for a way to beat the market. Buying a house at auction can be a way to get a good deal.
Yet buying a home at auction isn’t without its risks. To be a savvy auction buyer, you need to educate yourself on the process and proceed with caution.
What is a real estate auction?
A real estate auction is a public sale of a property. While a home may be sold at auction by a homeowner or builder, most auctions are held by governments or banks.
Auctions can be a good way to get a deal on a house because governments and lenders aren’t necessarily looking to make a huge profit. Typically, they just want to cut their losses by recouping the back taxes owed or balance due on the mortgage plus foreclosure fees and other costs.
You can buy all sorts of properties at auction, including single-family homes, multi-family homes, commercial property, and vacant land. For this article, we’ll focus on residential property auctions.
How do homes end up at auction?
Homes can end up at auction in a variety of ways. Homeowners or the estate of a deceased property owner may choose to auction off their property in order to sell it as quickly as possible, although this is rare — especially in a seller’s market.
Homebuilders may auction off a group of homes to sell them all at once. Usually, this happens when the homes have sat on the market for a while without a lot of buyer interest. But again, this is rare in a hot housing market.
These are the most common ways homes end up at auction.
- Banks foreclose on a property after a buyer defaults on their mortgage.
- Governments seize and auction off a property due to unpaid property taxes or the homeowner violating federal law.
- Homeowners associations take possession of a property and auction it off to cover unpaid association dues.
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How do real estate auctions work?
The auction house provides the terms and conditions for participating, but there are essentially three types of real estate auctions.
- Absolute auction: In an absolute auction, the property is sold to the highest bidder. There’s no minimum sales price, so these types of auctions tend to get a lot of interest from real estate investors. Absolute auctions are popular for properties auctioned off by banks and government agencies.
- Minimum bid auction: In a minimum bid auction, the auctioneer sets a minimum price the seller will accept for the property. This minimum bid is usually published in the auction materials. Minimum bid auctions are less risky for sellers because they know they’ll get a sales price at or above the minimum bid amount.
- Reserve auction: At a reserve auction, the seller has the right to review the bids and accept or reject the offers within a set period of time — usually within 72 hours after the auction concludes. Reserve auctions carry the least amount of risk for sellers because they’re not obligated to sell the property if nobody comes in with an acceptable bid.
How to buy a house at auction
Buying a home at auction differs from the standard homebuying process of touring a home and making an offer. Here’s a look at the steps you need to take.
1. Get your finances in order
Auction terms often state that they won’t accept an offer that includes a contingency for financing or that an offer must be a "cash" transaction.
This makes it seem like you have to have the full sales price in cash, but this isn’t always the case. Some auctions provide enough time for the buyer to secure a mortgage, but you’ll want to ensure you’re financially ready to do so before making an offer.
Work with your bank or lender ahead of time to ensure your finances are in order and get pre-approved for a mortgage so you know how much you can afford. Also, remember to set cash aside for repairs since homes sold at auction may need serious work.
You can compare mortgage lenders and see your prequalified rates when you shop for a mortgage on Credible.
2. Research properties
You can find properties up for auction in several ways.
- Online — Check out the U.S. Department of the Treasury’s Seized Real Property Public Auctions page for properties being auctioned off by the federal government. You can also search for properties being auctioned off by Fannie Mae at HomePath.com. Your county recorder’s website may also have information on local real estate auctions.
- Local newspaper — Your local paper may publish legal notices notifying the public of upcoming auctions.
- Local real estate agent — Many real estate agents have inside information on properties coming up for auction, and they can also search for auctions listed on the MLS.
3. Look at the house
Once you’ve found a few properties that pique your interest, drive by them and do a visual inspection from the street. You usually won’t be able to get into the home or get an official inspection, but if the property looks really run down from the outside, there’s a good chance the inside needs work as well.
4. Do your research
Research the property online at Realtor.com to get an idea of its value and what your maximum bid will be.
A real estate agent can also help with this process by gathering a list of recent sales of similar properties in the neighborhood and helping you do preliminary title searches.
You may also want to attend a few in-person auctions as a spectator before you plan to bid. This will help you familiarize yourself with the rules and get a feel for the process.
5. Follow the bidding process
Check out the auctioneer’s website for details on the bidding process. Bidding may take place at a live auction on the courthouse steps or via an online auction. There are generally two types of bids.
- Open: In an open auction, you know the amounts of other bids that have been made, and you can raise your bid gradually as needed.
- Blind: In a blind bid, you have to make a bid without knowing how others are bidding. If you don’t do your research ahead of time to have a good idea of what the property might sell for at auction, you could easily wind up overbidding.
If you have the winning bid, be prepared to hand over a cashier’s check for the earnest money — usually 5% of the asking price — immediately or within 24 hours of winning the bid. But some auctions require you to pay the entire amount upfront on the day of the auction, so make sure you know the rules before you bid.
Pros of buying a house at auction
- You may get a house for less than market value. One of the biggest advantages of buying a home at auction is the potential to pay far below market value for a home. Property owners selling houses at auction are usually looking to sell a property fast rather than turn a big profit, so it’s possible to find some great deals.
- You may be able to finance the purchase. Many would-be homeowners steer clear of auctions because they believe they need to pay for the property in cash. While that’s true in some cases, some auctions do allow for financing.
Cons of buying a house at auction
- You can’t inspect the property beforehand. Most auctions sell the property "as is," meaning the property owner doesn’t have to disclose the property’s history or condition. Often, auctioned properties were owned by people with serious financial problems, so the property may not be such a great deal if it needs major repairs.
- You may need cash. Buying a home at auction isn’t for people who don’t have substantial cash on hand. Even if you’re able to finance the property, you’ll need to have an earnest money deposit and money to pay for necessary repairs.
- You might get carried away during bidding. Many auctioneers set a low minimum bid to get buyers interested in a property. Once the auction starts, it’s easy to get carried away trying to be the winning bidder and wind up paying more than the home is worth. If you participate in an auction, decide on your maximum bid ahead of time and be prepared to walk away if bids rise higher than that amount.
- The property might not have a clear title. Properties sold at auction can have more than one lien on the home. Some of those liens might be removed as part of a foreclosure, but some may need to be paid by the new owner. Before buying a home at auction, do some research on the title. Otherwise you could wind up on the hook for back property taxes and other liens.
Before buying a house, it’s important to compare mortgage rates from multiple lenders. Credible makes it easy to comparison shop for a mortgage.
Other ways to beat a seller’s market and buy a house
Buying a home at auction isn’t the only way to beat a tough housing market and get into the home of your dreams. Consider these options.
- Make an all-cash offer. If you can get the cash together for an auction, you may be able to put enough together for a conventional purchase. Cash is king in a seller’s market because the existing homeowner doesn’t have to worry about the buyer’s financing falling through.
- Get pre-approved before you shop. Getting pre-approved for a mortgage before shopping for a home signals to sellers that you’ll be able to secure the mortgage you need to buy their home. This may make a seller more likely to accept your offer over another would-be buyer who may or may not be able to get their financing in order.
- Come in with your best offer right away. In a seller’s market, don’t expect to make an offer well below the asking price, ask to have closing costs covered, or negotiate repairs and other concessions. Homeowners may receive multiple offers, meaning you’re up against a lot of competition. The more haggling you do, the less likely your offer will be accepted.
- Offer a higher earnest money deposit. In a traditional home transaction, an earnest money deposit is normally 1% to 2% of the home’s purchase price. It lets the seller know you’re a serious buyer because they get to keep the deposit if you back out of the deal for a reason that isn’t allowed by the purchase contract. Offering a larger earnest money deposit can help set you apart from the competition.
- Offer above asking price. If you can afford it, consider offering more than the asking price for the home you want. A report from the real estate brokerage Redfin found that 39% of homes sold above their asking price in the four-week period that ended on March 21, 2021, with an average sale-to-list price ratio of 100.2%.
- Waive extra contingencies but don’t skip an inspection. One way to make your offer more enticing to the current homeowner is to waive contingencies — clauses included in your offer stating that certain conditions must be met for the deal to close. Common contingencies include the buyer securing financing and selling their current home, and the appraisal valuing the home for at least the agreed-upon sales price. Waiving contingencies can make your bid more competitive, but think twice before waiving a home inspection contingency. If you waive the inspection, you could wind up buying a home that has major defects, such as structural damage or hazardous conditions. These types of defects can cost tens of thousands of dollars to repair.
Buying a home at auction isn’t for the faint of heart. If you aren’t prepared to do your due diligence on the property you want to buy and walk away from a property with bids over your predetermined maximum bid, it may be best for you to stick to a more traditional homebuying process.