R.E.I. Capital Funding



 

 BUYING REAL ESTATE AT AN AUCTION:

THE BASICS



     


KEY TAKEAWAYS:

  • Buying a home at auction is riskier than buying through the usual process. It is vital to be well educated about how real estate auctions work.

  • You can find home auctions through local governments, real estate agents, and online sites such as RealtyTrac.com and Auction.com.

  • Auction properties often do not allow a home inspection or any legal way to view the interior in person. If you cannot afford the risk of buying a property in poor condition, stick with auctions that allow you to inspect the property before bidding.

  • Review and understand all auction rules and do your due diligence on any property you are interested in—for instance, check for claims, liens, and occupants before you bid.


What You Need To Know

Before You Bid

How Do Auctions Work?

There are a variety of different auction houses, and every one of them has their own rules. Even within one auction house, there may be a variety of auctions being offered. They must also conform to the rules of the state and municipalities in which they are located. Make sure you understand the rules of the specific auction you’re interested in before you bid.

Types Of Auctions

Auctions, whether in person or online, will be organized in one of three ways, and any single auction may deploy one or all of these types, depending on the property owner’s preference.

Absolute Auction

In an absolute auction, the highest bidder wins, regardless of the amount of the bid. You might bid $1 and win a house.

Absolute auctions attract the most bidders because there is no minimum. This is also the preferred method of most lenders and government agencies. All sales are final, meaning there is no room for the seller to back out in the face of a too-low bid.

Minimum Bid Auction

In this type of auction, there is a minimum bid amount on a property. The minimum bid is published in advance, and if you’re bidding in person (more on that below), the auctioneer will announce the minimum bid amount before opening bidding on the property. The minimum bid is generally the balance owed on the mortgage in the case of foreclosure, or taxes owed in the case of a tax lien. All sales at the minimum bid or higher are final.

Reserve Auction

In a reserve auction, bids are treated more like offers in that the seller can accept or reject the bid (but not counteroffer, as they may in the typical real estate transaction.) In these cases, the seller usually has a minimum bid in mind, but doesn’t want to share the amount, in the hopes they’ll get more at auction. If you’re bid is lower than the minimum amount the seller is looking for, they may simply reject the offer.

Types Of Bids

Sellers choose the bidding arrangements they want to try and increase the sale price.

Open

In an open auction, bidders know the amount of any other bids that have been made. Bidders like open bids, because they can see what the competition is doing and raise their bid gradually, as needed. If there is no competition, a lowball bid might just win. On the other hand, open bidding can result in bidding wars, and sometimes sellers reap a windfall.

Blind

Sellers generally prefer blind bids, even if it reduces competition. This process is more like bidding on a job. You’ll have to make a bid without knowing how others are bidding. Motivated buyers need to make a bold bid upfront instead of taking a wait-and-see approach.

If you’re an investor, you’ll have a good sense of how much to bid; if you’re looking to buy a home for your family, you might overbid because you lack experience or are too swayed by emotion.

In Person Or Online?

The world of auctions is rich and vast, and if you’ve never been to one, you should check one out in your area.

In Person

Attending an in-person auction can feel like taking a step back in time. It might take place right outside on the courthouse steps. There are the numbered cards, lifted almost imperceptibly and yet always seen and noted by the fast-talking auctioneer. The bidders wear sunglasses and hats, like high-stakes poker players, to hide any “tells” that might convey emotional responses.

If you’re a first-time auction attendee, you might not have a clue about what’s going on. Your best bet is to start attending auctions well before you plan to bid. Collect any sales materials being offered and read up on the rules. Much of this information can also be found on the auctioneer’s website. Get to auctions early or plan to stay after and ask questions of some of the auction house’s employees or other bidders. Pretty soon, you’ll develop an understanding and a feel for the process.

Online

More and more frequently, the auction process is moving online.

This is a boon to first-time bidders, as it is easier to get all the information you need, ask questions, and simply watch and learn. Make sure you study the rules, as each auction site operates according to its own procedures. On most real estate auction websites, you’ll have to preregister and prove that you are a serious, prequalified bidder, so leave time to complete that process well before the house you’re eyeing comes up for bid.

Of course, this increased accessibility means that there will be more bidders, so be prepared to face steeper competition.

What Are The Advantages Of Buying A House At Auction?

There have been countless books written and real estate workshops offered that extol the virtues of buying properties through the auction process, because it is possible to get a tremendous bargain.

Why? Because in the auction process, the lender is looking to cut their losses by recouping the balance due on the mortgage and their costs to foreclose. At auction, lenders are not interested in enriching the seller. The same is true for municipalities with a tax lien in place. Their interest is in coming as close as possible to having the tax bill paid and their costs recouped.

What Are The Disadvantages Of Buying A House At Auction?

There are several reasons why buying a house at auction is usually in the real estate investor’s wheelhouse and is an atypical way of buying a home to live in yourself. The reason the house is a bargain is because the buyer is taking on a lot of risk.

Houses Are Sold As Is

Homes at auction are sold as-is. That’s not so unusual, as many government-held foreclosures are sold in the same way. However, in most cases, it is highly unlikely that you will be able to even get inside a home sold at auction, let alone get a home inspection. It’s possible that the house is still home to the defaulting homeowners, tenants, or squatters have taken up residence there. In this case, “as-is” is closer to “sight unseen.”

You can drive by a house, but trespassing on the property, much less looking in the windows or entering the home, is illegal and unsafe – even if you did see them do it on a house-flipping reality TV show. If you are very experienced in-home improvement matters, you might be able to get clues to the condition of the property from the street or sidewalk. If you’re not, you’ll have no clear idea what you’re taking on when you bid on a home.

You Must Have Cash To Make The Purchase

Most auctions have very strict rules about how you can pay for your purchase, and they almost always involve cashier’s checks or cash. You can’t finance auctioned properties. There are loans available, and we will discuss them later, but in order to bid, you’ll have to prequalify by showing that you have cash available to complete the purchase, often on the same day as the auction. 

That’s why most purchasers of auctioned-off properties are real estate investors. They generally have the financial backing of investors, or they have set up their businesses to allow for high cash reserves.

You’ll Forego Common Protections

In the vast majority of real estate transactions, home buyers are legally offered consumer protections, lenders are required to make disclosures, and real estate agents must advise you as they would advise themselves. In the auction situation, none of that applies.

In addition to having little or no access to the home you wish to buy before you bid, you are responsible for doing your due diligence to make sure the title is held free and clear. Of course, the mortgage lender, and probably the taxing authority, have liens in place, but you have to make sure there are no other liens, as in the case of a home equity loan in default or unpaid homeowners’ association fees. If there are, you will be responsible for paying those liens off when you acquire the title to the property.

After You Win At Auction, The Property Could Revert To The Previous Owners

Even if you win at auction, you can still lose the house. If the owner is suddenly able to bring their mortgage current, work out a forbearance plan with the lender, or negotiate a short sale, you will walk away empty handed. Until you receive the title with your name on it, which usually takes about 10 days after the auction ends, you have no guarantees.


DUE DILIGENCE:

10 STEPS TO TAKE BEFORE YOU BUY

Due diligence in real estate is one of the most critical periods in any real estate transaction. But many buyers cut corners in the real estate due diligence process in their haste to have their bid accepted. Here are 10 due diligence real estate steps you shouldn’t skip, especially if you’re considering a foreclosure, bank-owned property or short sale.


1. Do a title review. Always get a preliminary title report on any foreclosure property you’re interested in buying, and look for any secondary liens or tax liens. Make sure there aren’t any hidden liens or encumbrances on the property that will blossom into unpleasant surprises later.

2. Inspect the property thoroughly. You may not be able to get inside a foreclosure property that’s still occupied. But if you can, have a licensed professional inspector review the house for evidence of structural defects, water damage or other major problems.

But most importantly, make sure everything is functional. I know of one case where an owner who had lost his home to foreclosure did what some owners do in that situation: he ripped the wiring out of the walls and took the piping. But then he did something different: after he was done, he put up new drywall. So when they did an inspection of the house, it looked fine, but there was no wiring or piping behind the walls.

What if you can’t inspect the property, other than driving by it? For the properties listed on Auction.com, once you have an account and find potential real estate you’re interested in, you can access its due diligence documents in a secure online “vault.” Be sure you’ve read and understand all of these documents before the auction.

3. Consider the surrounding property and neighborhood. Don’t confine your inspection to the structure itself. Look around at the landscaping. Does the property back up against a bank that has no vegetation? Will the drainage work in the event of a heavy storm?

Check out the surrounding neighborhood as well, as its condition can affect the value of your real estate. Do you see pride of ownership in the other homes? Or do you see abandoned properties in the area? And note that abandoned houses aren’t just a problem in “bad” neighborhoods. Because of the recent housing crisis, you might find abandoned or unfinished homes even in relatively new housing developments.

4. Examine recent sales activity. Look at how many days homes have stayed on the market. Are properties moving quickly or languishing? What are the buy vs. rent trends in the neighborhood? How many of the homes sold were distressed inventory? Too many sales overall could suggest that people are leaving the neighborhood—see if there’s an underlying reason why.

5. Review price trends. Are they going up? Have they plateaued? How do they compare to what they were during the last peak? That information should give you an idea of whether property values are going up or down, and help you figure out what you should be spending.

6. Find out how many homes in the area are in foreclosure. Too many suggests price weakness over the near term. Are there a disproportionate amount of distressed properties in the area? Before the crisis, only about 1% of properties went into foreclosure in any given year—or one home out of every 100. In today’s environment, you might see maybe three or four. But more than that might indicate a problem and a reason the property is priced as attractively as it is.

7. Look at the upside potential. Are you near a good school? Are you near a transportation hub? Are there new businesses that are popping up or being launched in the area? Those are potentially all good upside opportunities for you. Conversely, has there been a plant shutdown recently? That will probably lower property values. The local chamber of commerce can supply some of this information; it also helps to have some local connections.

8. Go to open houses. See what the standard of quality is in other homes that are currently for sale. Are tile countertops fine, or do I need to install granite? This is a good thing to do whether you’re planning to flip the home or rent it. It doesn’t mean you have to overspend. Find out what makes others want to buy real estate. You then you want to meet the neighborhood standard or be slightly above it, and spend as little as you can to attain that standard.

9. Research zoning requirements. If you’re going to rent out the property, consult with a real estate attorney to see if there are any local ordinances or laws that might make it difficult to be a landlord. Some areas aren’t zoned for rental property. Some developments limit the number of rentals in the neighborhood; others have limits on the number of adults that can live in a single house, which could be a problem if you plan to rent to people who want to room-share (like college students).

10. Check your liability insurance. If you’re going to be a landlord, check with your insurance agent to find out how much liability and property insurance you’ll need.

These 10 steps may sound like extra work, but if you follow this property due diligence checklist for any type of property, they’ll pay off in the long run. Whether you’re going to occupy it, flip it or rent it, real estate is one of the most expensive investments you’ll ever make. It makes sense to protect it, so make sure not to overlook the due diligence process.


Real estate opportunities found at an auction:


A real estate auction involves the public sale of a property through competitive bidding.

The most common reasons for real estate auctions include:

  • Mortgage foreclosures

  • Unpaid property taxes

  • Unpaid homeowners association fees

  • Estate sales

Auctions might be held in person or online. They’re typically run by the sheriff or another county official, but there are also companies that specialize in auctioning real estate on behalf of banks, governments, and estates.