If you’re looking for a home, you likely want the best house for the least expensive price. After all, that’s the optimal way to maximize the size and amenities of the house considering what you can afford, right?
As you look around, it’s prudent to consider buying property at an auction. Auction properties can often be had for below-market prices.
Why? Homes are auctioned for two reasons: foreclosure and tax liens.
Why Homes Are Sold at Auctions
In a foreclosure, the property owner is unable to pay the mortgage to the lender. After a lengthy process of up to a year, the lender of the property seizes the property back from the mortgage holder who is in default. The lender then arranges for an auction and auctions the property off.
In a tax lien, the property owner has become severely behind in tax payments, either of property or state and local tax. In this case, the tax authorities, not the lender, seize the house and auction it off.
In both cases, the homes are being auctioned because of a previous homeowner’s financial distress. It is in the lender’s and the tax authority’s interests to get the home sold as expeditiously as possible so that the property can be removed from the lender’s books. Mortgage and tax payments begin again with a new homeowner.
It’s likely you have a number of questions about buying property at an auction. Here’s a complete guide to buying property at an auction.
1. Where to Find Properties
There are multiple ways to find properties up for auction. Check online, look at foreclosure listings or look on sites for the county or municipality records of property, which sometimes have lists of properties likely to go on auction. Many reputable auction companies are now online and have consultants to walk potential property owners through the process.
2. How to Examine the Property
It’s very natural for a prospective property owner to want to examine the property. Some auction houses set up open houses to potential buyers can do a walk-through. Others have records of maintenance that has been performed, such as pest and other housing inspections. Some listings of property to be auctioned may be very detailed. Others may not be accessible to walk through.
Most foreclosure and tax lists will contain addresses. It’s possible to drive by and look at the property before you bid.
3. What to Do Before Bidding
Before you bid, figure out what you can reasonably pay for the property. Calculate the mortgage payments, interest, property tax and any mortgage insurance. Add what you will reasonably pay for maintenance and upkeep to the property. Many lenders require prequalification before an auction, just as they do before approving a mortgage.
If possible, have inspections performed if they have not been previous to the auction.
4. Types of Auctions
There are two types of auctions. The first is called an “absolute auction,” and the highest bidder wins the property. The second is called a “lender confirmation auction.” In this, the winning bidder must have been accepted and approved by the lender before the auction.
In other words, in a lender confirmation auction, the highest bid may be $300,000, but it will not be a winning bid unless the lender has accepted and approved the offer. In an absolute auction, if the highest bid is $300,000, it will win the property.
5. Where Do Auctions Take Place?
Many auctions now are held online. Others take place at courthouses, sheriff’s offices or hotel conference rooms. It’s a good idea to attend auctions before going through one in which you plan to buy a property to see how they work.
6. What Are Average Auction Prices?
For foreclosure auctions, a starting price may be the amount still owed on the mortgage. It also may be priced lower to facilitate buying, depending on the lender’s eagerness. By law, lenders cannot realize a profit beyond what they are owed in a foreclosure sale. Many foreclosure and tax lien auction properties are sold at a loss. Search auction lists and online sites to get an idea of the prices for existing properties.
7. What Do I Need to Bring?
Many auctions require you bring a cashier’s check for the down payment to the auction. Be prepared to pay earnest money and any fees associated with the auction. After that, if yours is the winning bid, you will have to pay closing costs and other fees just as you would if you were getting a mortgage through a lender without an auction.
Auctions can be a way to buy houses for less than they are worth, which is a good method for maximizing the amount of house you get for the money you can afford. Whether you are looking for a forever home or are in the market for something to flip, auctions can expand your options.