Should you buy a house at auction?

How Do Properties End Up at Auction?

The two main types of property auctions are foreclosure auctions and tax lienauctions. Before a property reaches this stage, several things have to happen.

First, the homeowner has to have not paid the mortgage for several months. Then, the bank files a notice of default with the county recorder.

The other main way a home ends up at auction is when the owner doesn't pay property taxes or becomes severely delinquent on state or local income taxes. In these cases, it is the unpaid tax authority (not the bank) that seizes the property.

How Property Auctions Work

Auctions take place at local government courthouses and other locations chosen by auction companies, such as hotel conference rooms. Homes are also auctioned online. Foreclosure auctions are held by bank-hired trustees. Tax lien auctions are conducted by local sheriffs.

Winning a property at these auctions can work in two different ways. In a lender confirmation auction, the lender doesn't have to accept your offer even if you are the highest bidder. In an absolute auction, the winning bid gets the property.

The starting price of the auction may be the balance owed on the mortgage or may be a lower amount designed to spur bidding. In the case of a foreclosure auction, the lender is not allowed to profit from the auction. Often, these properties are sold at a loss, but if there is a profit, it is supposed to go the foreclosed homeowner after the mortgage and any other liens are paid.

As for payment, bidders should bring to the auction a cashier's check for the amount of money required by the auction holder. Winning bidders will pay any auction fees and/or bidding fees and put down an earnest money deposit on the property they are purchasing before leaving the auction site. The winners then go through escrow and closing just like with any other home purchase. Bidders at property auctions are often real estate investors who can afford to pay cash, but for auctions that allow financed purchases, it is best to get prequalified ahead of time.

What is Reserve Price

Reserve price is the minimum amount that the owner of an item up for auction will accept as the winning bid in the auction.

Example of a Reserve Price

For example, an Ohio auction house has scheduled an auction to liquidate the equipment from a bankrupt manufacturing firm. one item on auction is a stamping press used to shape sheets of steel into automotive body panels. The auction firm sets a reserve price of $250,000 based on the recommendation of the bankruptcy trustee but opens the bidding at $100,000. After several bidders bring the price to $175,000, a firm that once competed with the bankrupt parts maker bids $200,000 for the press. No higher bids are offered and the auctioneer removes the press from the auction because the reserve price has not been met.

Drawbacks

Properties being auctioned off aren't necessarily hidden gems. If a property winds up at auction, it means the owner was having financial trouble, so the house may have deferred maintenance problems. It might even be completely trashed. Also, there may be claims against the home – not just the aforementioned tax liens, but contractor liens or a second mortgage. Bidders should check with the auction house to ensure that the property has clear titles.

Buying a property at auction often requires a lot of cash. More flexible financing options may be available by purchasing a bank-owned property the traditional way, instead of at an auction

Also, in some cases, the (former) owner or a squatter will be occupying the property, meaning you will have to evict them – a process that can be unpleasant at best, and lengthy and expensive at worst. (For details, read 5 Mistakes Real Estate Investors Should Avoid.)

DEFINITION of Squatter

A squatter is a person who settles in or occupies property with no legal claim to the property. A squatter is one who resides on a property to which he or she has no title, right or lease. A squatter may gain adverse possession of the property through involuntary transfer. A property owner who does not use or inspect his or her property for a number of years could lose the title to another person who makes a claim to the land, takes possession of the land and uses the land.

Finally, if you're an ordinary person trying to buy a home at auction, be prepared to face stiff competition from investors looking to snap up properties to flip or turn into rentals.

The Bottom Line

If you're interested in trying to pick up a bargain property at an auction, there's a lot to learn. Auctions can be a riskier way to purchase a property than buying a property through a real estate agent, so it's important to be extremely well-educated about the process and about the properties you are interested in bidding on.

Foreclosed homes may be financially appealing, but there are many obstacles to consider before buying. Also, just because a home is for sale at auction doesn't mean that you'll be able to get it at a good price (or that the home is a good deal at any price – it could be a money pit!). But for savvy, intelligent and motivated individuals, property auctions are worth exploring as a way to pick up a home or an investment property on the cheap.