What To Know About Buying A House At Auction

For most Americans, buying a house traditionally looks like this: getting mortgage preapproval from a lender, hiring a real estate agent and finding homes for sale on home shopping websites collected from a multiple listing service (MLS). However, there are less conventional ways to purchase a home that may work better for you.

Maybe your home buying price range is too low for the community you want to live in. Or you’re not a fan of the finishes on the houses you like and suspect you’ll need to pad your budget for renovations.

When you hit these or other roadblocks, it may be time to consider alternative methods of finding your next home. Buying a house at auction is one of these methods.

What A Real Estate Auction Is And How It Works

A real estate auction is a sale open to the public where buyers can place bids to purchase real estate. The rules can vary by auction, but the basic principle is the same: The property goes to the highest bidder.

The purchase price of a property at auction can be considerably less than if it were listed on the MLS due to how it ended up at auction.

How Houses End Up At Auction

Houses sold at auction are usually tied to owners facing a stressful financial situation, which may result in a discounted price. When a seller is in no rush to sell, they can let a property sit on the MLS and wait for the highest purchase offer. A property may end up at auction when a homeowner is facing some sort of financial hardship and needs cash fast, which is usually the case for two main reasons: foreclosure or property tax default.

• Foreclosure: When a homeowner can’t make their mortgage payments, their lender uses a lien (a claim against a property) to initiate foreclosure, which can end with eviction. Foreclosed homes often end up at auction because the lender wants to recover as much of a homeowner’s outstanding mortgage balance as they can. Lenders aren’t necessarily trying to sell the property at fair market value.
• Property tax default: You pay property tax whether you own a residential or commercial property. Property tax default means you failed to pay your property taxes. When this happens, the local municipality can put a lien on your property, like a lender initiating foreclosure. If the foreclosure can’t be stopped, the owner will face eviction, and the property can go to auction.

Types Of Real Estate Auctions

Real estate auctions come in all shapes and sizes. Auction rules, locations and the range of properties you find will vary. The most common types of auctions you’ll come across include absolute auctions, minimum bid auctions and reserve auctions. Let’s look at how these different auctions work.

• Absolute auction: At an absolute auction, the property goes to the highest bidder – no matter how low the highest bid is. Absolute auctions typically attract the most buyers because there’s no minimum bid to participate. Lenders or other lien holders must accept the highest bid, no matter how low it is – and all sales are final.
• Minimum bid auction: At a minimum bid auction, there is a minimum buyers must bid on the property. The minimum amount will vary by auction, but it’s usually the remaining balance on a mortgage or the total in overdue property taxes. The minimum bid is set and published before the auction. And like absolute auctions, all sales are final.
• Reserve auction: A reserve auction works more like a traditional real estate transaction. Buyers place bids, and a seller can accept or refuse offers. Unlike a traditional real estate transaction, a seller can’t submit a counteroffer.

Types Of Bids

There are two common bidding types you’ll likely come across during an auction: open bidding and blind bidding. Sellers choose their preferred bidding type in an attempt to secure the highest purchase price. Let’s discuss how the different types of bidding work during an auction.

• Open bidding: During open bidding, all buyers can see what their competitors are offering and adjust their bids as the price climbs, which can lead to bidding wars. If there’s little to no competition, you may be able to buy a house at auction at a steep discount.
• Blind bidding: During blind bidding, potential home buyers submit their bids but don’t know what other buyers are offering. This bidding method can benefit sellers because eager buyers are encouraged to make their best offer upfront to avoid underbidding. This is sometimes referred to as “bidding against yourself.”

Pros And Cons Of Buying A House At Auction

Consider the pros and cons of buying a house at auction to determine whether this strategy to buy a house is right for you.

How To Buy A House At Auction

So now that you know what an auction is and how properties can end up there, let’s get into the nuts and bolts of how they work. To buy a house at auction, you must prepare so you can execute the purchase confidently.

1. Research Your Rewards And Risks

Your first step before you ever place a bid should be to evaluate the rewards and risks of the real estate auction process. Think about the properties you saw while looking for a home using the traditional home buying process. Compare those homes to the ones up for auction. Compare pricing, locations, house features and more.

How do they compare? Do any properties you see up for auction strike you as a home you can live in or manage as an investment property, even if they need a little – or a lot of – sprucing up?

2. Determine Your Budget

To help ensure you don’t get carried away while bidding, determine your budget and know how much house you can afford before participating in a real estate auction. Auctions can be exciting, and it’s easy to get carried away when you’re attached to a property. Set and stick to your budgeted limits if a bidding war breaks out. Remember, you can’t only focus on the purchase price. Because these homes are typically sold as-is, you’ll likely need to set aside money for repairs.

3. Secure Cash Or Financing

You’ll need cash or preapproval lined up before buying a house at auction. Depending on the auction’s requirements, getting preapproved isn’t always necessary – but it’s always a good idea. While you may know your budget, lining up proof of funding, like cash in the bank or mortgage preapproval, adds an extra level of certainty.

Most auctions are cash-only, but you may be able to finance your purchase with a home loan. Read through these popular options to learn how to buy a house at auction without cash.

• Hard money loan: A hard money loan is a type of short-term financing with high interest. Property flippers commonly use hard cash loans because they’re typically repaid quickly, generally within 6 months to a few years. The loan’s short repayment term typically aligns with a flipper’s goal to fix and flip a property as soon as possible.
• Delayed financing: Delayed financing involves buying a home with cash upfront and then obtaining a cash-out refinance to mortgage the property. You must meet a lender’s appraisal and home inspection requirements for approval.
• Personal loan: You typically receive the money from a personal loan quickly, and you don’t need to put up collateral because personal loans are unsecured. Your credit history and credit score will determine the terms of the loan. One drawback is that a personal loan may not cover the entire cost of purchasing the home and making possible repairs.
• Home equity loan: If you own a home and have enough equity, you can take out a home equity loan to get the cash you need. Your home will serve as collateral for the loan, which offers competitive interest rates and long-term repayment periods.
• Peer-to-peer (P2P) lending: Peer-to-peer lending can help finance a low- to moderate-priced home. You can borrow money through online platforms that connect borrowers to individual lenders or groups of lenders. The terms and conditions of the loans can vary. Like hard money loans, the interest rates are high, and borrowers usually make large down payments.

4. Register For The Auction

Find out where to register for the auction, whether in person or online (we’ll cover each type later in the article). After registering for an auction, add the date and time to your calendar and review any requirements. What you need to bring to the auction can vary, but the required documentation usually includes proof of cash funds or preapproval from your lender.

5. Place Your Bid

Aim for a winning bid on a property that doesn’t ruin your budget. For many buyers, the goal is to get a property for the least amount of money. This means researching current market conditions and real estate comps to help determine what a property is worth.

Beyond that, you’ll have to make educated guesses on what competing buyers will bid. The best way to improve your ability to find that bidding “sweet spot” is to attend many auctions and take notes.

6. Seal The Deal

The winning bidder must meet payment deadlines to secure the property deed. The seller can cancel the contract if the winner can’t follow through. The winning bidder will likely lose their deposit, and their ability to bid at future auctions may be temporarily or permanently suspended.

It takes more than a winning bid at auction to become the new property owner. If the original homeowner can work out a deal with their lender, like paying their overdue mortgage payments with one lump sum, they can still get the house back. This period lasts about 10 days. If the homeowner can’t settle with their lender and you receive the title, the property is now officially yours!

Tips For Buying A House At Auction As A First-Time Buyer

Your first time buying a house at auction may feel a little overwhelming. Even if you know the auction’s requirements, have a budget and have researched the properties, there are a few more tips to consider to set you up for success.

Consider Online Vs. In-Person Auctions

In the past, auctions were only in person, usually at a country courthouse or other local municipal building. Back then, prep work meant getting paper copies and poring through a stack of documents. But times are changing. More and more auctions are moving online, making them more accessible and opening them up to a larger pool of home buyers.

In-person auctions can seem a little strange at first. Buyers may gather at interesting locations and are likely “bidding blindly” without much information about the properties on the auction block. You should attend a few in-person auctions to get the feel for it before ever placing a bid.

Online auctions are often more manageable for today’s buyers. It’s not uncommon for first-time attendees to submit bids. While the auction is online, you’ll likely need to follow in-person auction rules and register and show proof of funds or mortgage preapproval before you can join in.

Save For Cash Requirements

Auctions typically require cash to buy a house, and they set the payment guidelines. Cash leads to faster sales. And when a home is at auction, time is of the essence. In addition, many lenders won’t approve a loan for a distressed property, which you commonly find at auctions.

Hire A Real Estate Agent

It’s not a requirement, but it’s a good idea to work with a real estate agent or REALTOR^® throughout the real estate auction process. They should have a good sense of the local market and recent comparable sales, improving your odds of submitting a successful bid without overpaying.

Understand The Risks Of Houses Sold As-Is

At auctions, houses are typically sold as-is. Houses are usually sold without repairs or renovations because the sale needs to happen quickly. It’s important to consider the home’s condition when thinking about buying a house at auction. Do your best to learn as much as you can about a house before buying so you understand what you’re potentially getting into.

Check your local paper or postings at your local courthouse for in-person auctions. A quick Google search will provide a litany of options in your area for online auctions.

You can also work with a real estate agent. They can search for auctions listed on the MLS and often have behind-the-scenes information on properties for sale at auction.

Alternatives To Buying A House At Auction

Of course, auctions aren’t the only way to buy a house. You can use the traditional method and search for homes listed in the MLS. The home prices won’t be as low, but protections like home inspections and Seller Disclosures can offer some peace of mind.

Another alternative to buying a house at auction is a short sale. When a homeowner can’t pay their mortgage, a short sale is a strategy they can use to avoid a formal foreclosure. If their lender agrees to accept less money than they owe on their mortgage, the homeowner can initiate a short sale. One major benefit of a short sale for home buyers is that they usually don’t bid against other buyers.

The Bottom Line: You Can Buy A House Below Market Value At Auction, But Buyer Beware

Buying a house at auction can be a great way to stretch your budget and buy a property at a steep discount. However, auctions have restrictions you should be aware of, and buying a house at auction can be risky. Tread lightly at the beginning as you learn the ropes.

Ready to get started but don’t have the cash? Find an auction that allows financing and start the mortgage process online to strengthen your offer.