Have you been considering buying a home auction- there some really great deals in auctions? The good news is that everything you need to know about buying a home in an auction is within your reach! Keep reading to learn more about the following:
- What’s a home auction?
- How a home auction works
- Types of home auctions
- Why do homes go to auction?
- Tips for buying a home auction
- How can you finance the purchase of an auctioned home?
What’s a Home Auction?
Auctioned homes typically involve the sale of foreclosed houses at possibly below market value. They can serve as a low-cost gateway to homeownership. However, home auctions involve plenty of risks; for instance, you may not actually get to step inside the house before bidding on it. As such, it’s vital to understand how real a home auction works before bidding.
How a Home Auction Works
When a homeowner misses several months of home loan payments, the lender can place the house under foreclosure and move to evict the owner. They put the house in a foreclosure auction, from which they hope to recoup what the owner still owes on the mortgage. The lender isn’t allowed to get more or profit from the auction. On the other hand, if a homeowner fails to pay property taxes for years, the local tax authorities can place the house in a tax lien auction.
Types of Auctions
There are typically 3 types of auctions:
- Absolute Auction: In an absolute auction, the highest bidder will win, regardless of the bid amount. Absolute auctions attract many bidders since there’s no minimum. It’s also the preferred method most lenders and government agencies use.
- Minimum Bid Auction: With this auction, there’s a minimum bid amount on the house. The minimum bid is often published in advance, and the auctioneer will also announce it before opening bidding on the house.
- Reserve Auction: With a reserve auction, bids are treated like offers. As such, a seller can accept or reject the bid.
Why Do Homes Go to Auction?
There are various possible reasons a home may go up for auction. However, the most common reasons a property goes to auction are:
- Foreclosure: A foreclosure auction happens if the homeowner fails to make payments over a series of months and the lender has “foreclosed” or taken possession of the house. The lender sells the property in this situation, creating the starting but- typically the amount owed, plus expenses and fees. You can then make that bid, or higher. to get the auction ball rolling.
- Tax Liens: This is similar to a foreclosure auction, but the house is seized due to unpaid taxes or tax fraud. Typically, it’s the lien being sold and whoever owns that lien has the right to collect it from the homeowner or seize the property if they aren’t paid.
Tips for Buying an Auction Home
Here are some tips that can help you navigate the auction process:
Check the House Yourself
You aren’t allowed to go into a foreclosed home since it’s often occupied. But you can do a drive-by to get an idea of the property’s state. Sometimes, if the house looks good on the outside, it may also be good on the inside. Keep in mind that an auctioned home is sold as-is, and you won’t be able to have a home inspection like you would in a conventional home purchase. Also, it’s paramount to enlist a skilled real estate agent to help you do your due diligence on the house before making the bid.
Do a Title Search
You can hire a real estate attorney to do a title search before the auction date. That way, you can learn if there are any liabilities on the property. Note that any liens can become your responsibility if you buy the property. Things like court judgments, unpaid taxes, and mechanic liens are all possible landmines.
Have Your Finances in Order
Every auction place, in-person or online, has its own rules and regulations, but you can expect to have to put down a chunk of money upfront. Most auctions accept cash, bank money order, or a cashier’s check for payment. In some, you’ll have to pay in full immediately after the auction concludes, while in others, you’ll pay a percentage (usually 5% to 10%) at the auction and the rest within a specific time frame.
Know Your Limit
You should figure out what you need to pay for an auctioned home to make it worth your while. It might be challenging to stick to, especially if there’s a bidding war and emotions are running high. However, if you know exactly when to walk away, you’ll avoid overpaying for an auctioned home.
How Can You Finance the Purchase of an Auctioned Home?
While auctions often require cash, there are several ways that may help you to finance an auctioned home purchase, including:
Hard Cash Loans
Hard cash loans are mortgages that are high interest and short term compared to conventional loans. Typically, these loans are suitable for property flippers, whose business is to fix up and sell the auctioned property as quickly as possible, paying off the loan, and pocketing the profits. Note that it may not be suitable for bidders who plan to live in the property due to their high interest rates.
In a delayed financing loan, you can pay for the house upfront, and then immediately refinance the house to take the home equity back out, presumably to buy more homes. Delayed financing can also work if you borrowed money from family or friends to make the initial purchase of an auction home and need to repay those loans.