While many people go through the traditional route of buying a property, other real estate investors and buyers take a not-so-ordained path. Some people either buy a home through an auction or make an investment in real estate using the auction process. While this form of purchasing a property is not designed for everyone, it can provide a savvy investor with the platform needed in order to make a good buy.
A Public Sale of Property
To understand how a real estate auction works, you first have to define it. An auction for real estate is a public sale of property. In the past, this type of sale format was limited only to real estate agents or investors. However, anyone, now, with an interest, can buy real estate this way.
Why Are Houses Auctioned?
Houses are auctioned for one of various reasons –
- The house is in foreclosure.
- The bank repossessed the property and now wants to sell it to recover the money that was originally lent.
- The homeowner of the property owed the government and now the government is selling the real estate.
Partner with a Real Estate Agent or Broker
The best way to receive notifications about auctions is to align yourself with a real estate agent or broker who can provide you with the info or to do an online search. You can also find auction listings in newspaper ads. Auctions are held at conference centers, courthouses, or at an auction company’s place of business. They are also featured online.
Types of Property Auctions
Three kinds of property auctions are normally held. These include –
- A reserve auction. In this auction, the lender can reject a buyer’s offer even if he is the highest bidder. The reserve price is not advertised or made known to the bidders.
- An absolute auction. In this type of auction, the highest bidder instantly wins the real estate.
- A minimum bid A specified price is given in order for the auction to begin.
The beginning auction price for a property might be a remaining balance on a mortgage or a lower amount in order to pique the buyers’ interest. When foreclosure auctions are held, lenders cannot profit from the sale as the properties are frequently sold at less than market value.
Payment for Auctioned Real Estate
Purchasers who plan to bid on a property should be ready to pay for the real estate at the auction. Therefore, you will need to come prepared with a cashier’s check for the money that is needed to complete the buy. If the auction permits financing, you need to be pre-qualified before the bidding begins. Auction winners go through a closing just like buyers of traditional real estate. Auction fees are also included in the purchase price.
While you may be getting a good deal at a real estate auction, you also have to be careful about buying property. That is because many properties that are auctioned were default. As a result, you can run into serious repairs or maintenance issues or the property may be outdated inside. Also, some auctioneers do not permit tours before a property is sold. This is often done to appease an existing tenant who could gut or trash the property, when moving, after the sale.
Before you bid on a property, check on any existing liens as well. Work with a real estate agent or the auction company to research the home’s title before you make a bid. Above all, make sure you can handle paying for the real estate. Buyers who withdraw winning bids often must pay steep penalties.
Real Estate Auction Steps
If you decide to go ahead with a real estate auction, here are the steps you must follow:
STEP #1 – Find and file properties:
It’s important to get up-to-date auction information and act on it as quickly and on a regular basis . Develop a system to keep track of properties that interest you. A good tracking system is important since most successful auction buyers pursue several properties sometimes over a period of several months.
After you find a property online, it’s a good idea to drive by the property to get a better idea of the property’s condition and the type of neighborhood. For some buyers and investors, driving by the property has also facilitated a casual meeting with the owner (you may be able to still work out a last-minute deal before the auction) or yielded a wealth of unexpected information from a talkative neighbor.
STEP #2 – Confirm auction status, location and bidding procedure
After a property is scheduled for auction, the owner has a chance (typically less than a month) to stop the auction by paying the amount owed to the foreclosing lender. It’s also not uncommon for auctions to be postponed without a new date being published. Although cancellations and postponements are announced at the time and location of the originally scheduled auction, you can call the trustee to find out beforehand. .
Most auctions are at a public place in the same county where the property is located. In many states, all the auctions in each county are at the same location. If the auction location is not listed on RealtyTrac, you can typically get that information from the trustee or the county clerk. If you call the county clerk, make sure you clarify that you are looking for the location of mortgage foreclosure auctions, not tax foreclosure auctions.
The bidding procedure varies from state to state, so you should become familiar with the procedure in your area before bidding at an auction. In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier’s check to the auction. In other states, bidders are required to bring a certain percentage (10 percent is common) of the bid amount to the auction and pay the remainder of the amount within a certain timeframe if they are the highest bidder. If you get a friendly representative when you call the trustee, you might be able to get information about how the bidding works in your area, but in most cases you’ll need to educate yourself. You can get started by reading state foreclosure laws. You could also contact a local real estate agent or attorney in your area. Of course, the best education will come from simply observing a local auction.
STEP #3 – Check potential bargain
You need to find out as much as you can about the estimated market value of the property, how much is owed on the property and if the owner has any other liens against the property. This is all public information and you can research on your own with the county recorder or you can use RealtyTrac’s property reports and tools to help.
The opening bid at the auction is based on the total amount owed to the foreclosing lender and may include fees incurred because of the foreclosure proceedings. If no one bids above that amount, the foreclosing lender will take possession of the property. It’s important to know this amount so you can determine if the auction represents a potential bargain purchase when the opening bid is compared to the property’s market value. RealtyTrac subscribers have access to the opening bid amount and the estimated market value for properties scheduled for auction.
If there are outstanding liens on the property, the winning bidder at the auction may be responsible to satisfy these liens in some cases, so it’s important to check for any liens and the priority of the liens before you bid at the auction. A real estate attorney or title company can check for liens, or you can check directly with county records.
The priority of a lien is usually determined by the date it was placed on the property. So a first mortgage will usually have the first priority, and all other liens will be considered junior liens. In most states, the public auction clears out any junior liens, but there are exceptions such as tax liens, which typically will continue to be in effect after the auction.
STEP #4 – Determine bid amount
Based on all the factors used to determine the potential bargain – and your financial capability – you’ll need to determine how much you can and should bid at the auction.
Determining your bid amount is more obviously important in states where bidders are required to bring the full amount in cash or cashier’s check to the auction. You won’t even be qualified to bid if you don’t meet that requirement. If you don’t have that type of cash lying around, you have a couple options. If you own a home, you might be able to take out a home equity line of credit, which is a cash loan. If you can’t secure a cash loan, you may consider trying to buy a pre-foreclosure or bank-owned property, both cases where you can usually obtain a regular mortgage loan secured by the property being purchased.
It’s also important to determine the bid amount even in states where you don’t need to bring the full amount to the auction. By setting a firm ceiling for your bid, you’ll avoid getting caught up in the heady auction atmosphere and overbidding, which can result in little or no bargain for you. Also, if you’re not able to pay the remainder of the bid within the time frame stipulated by state law, the deposit you paid at the auction is often nonrefundable.
A reasonable purchase amount at auction is at least 20 percent below full market value, and much better deals are often possible. Other factors to consider are the rate of real estate appreciation in the area and the potential for increasing the property’s value by making repairs and improvements.
STEP #5 – Bid at the auction
Call the trustee the day before or the day of the auction to check one last time if the auction has been canceled or postponed. If an auction is postponed, the trustee should provide the new auction date.
Arrive at the auction location early and locate the auctioneer as quickly as possible. Bidding at an auction can be intimidating, especially if you’ve never done it before. Take as many cues from the other participants as you can, but don’t let them dictate how much you bid. You may encounter investors who attend many auctions every month and who don’t necessarily appreciate new competition.
STEP #6 – Take ownership
If you are the winning bidder, make sure you get the necessary documents from the auctioneer to verify that you are the winning bidder. Clarify with the auctioneer and a real estate attorney what further steps need to be made before you take ownership and possession of the property. In some states, ownership can be transferred immediately or within a few days. In other states, you may need to wait a month or more for the sale to be confirmed by a court. Some states have redemption periods for the owner, in which case the owner can buy the property back from you if they pay the full amount paid at the auction, plus applicable fees. You should avoid spending money on repairs or improvements during the redemption period.