Should You Buy a House at Auction?

The decision to buy a house at an auction rests on your financial circumstances, how well you've prepared yourself with research on the process and a property, and if you can tolerate the financial risks. Auctioned homes come in a range of conditions, from no issues to hundreds of problems.

There are several things to consider and actions to take before you jump into a home auction hoping for a great deal. Learn more about house auctions to see whether it is an option for you.

How a House Auction Works

Usually, homes are seized and auctioned for one of two reasons, foreclosure or property tax default. Having knowledge of each might aid your evaluation of a home for a potential purchase.

Foreclosure

If a homeowner does not make their mortgage payments for several months or renegotiate the mortgage with the lender, the lender can file a notice of default with the county recorder. If the owner continues not to make payments, the lender can legally force the homeowner out for nonpayment and place the home up for auction. These foreclosure auctions are held by bank-hired trustees.

Property Tax Default

This occurs when the owner does not pay the assessed property taxes on their home. In these cases, it is the unpaid tax authority, rather than the bank, that seizes the property. The resulting tax lien auction is conducted by a local sheriff, clerk, or the county or local tax authority’s comptroller’s office.

The Auction

Once homes are foreclosed on or seized, they are listed and scheduled for auction. To participate, you will have to register and submit a refundable deposit of 5% to 10% of the property’s expected selling price to the entity holding the auction. If the auction is in person, be sure to check in at least an hour before the scheduled start and obtain an official card, which you will raise when you are ready to bid.

You can place bids on and win a property at auction in a few different ways:

• In a lender confirmation auction, the lender does not have to accept your offer, even if you are the highest bidder.
• In an absolute auction, the winning bid gets the property.
• In a blind auction, each bidder places a bid shown only to the seller.
• In a minimum bid auction, the seller sets a reserve that must be met by bidders.

The starting price of the auction may be the balance owed on the mortgage or a lower amount designed to spur bidding. In a foreclosure auction, the lender is not allowed to profit from the auction.

Finding a House Auction

One way to find auctions is by contacting local governments directly or visiting their websites for information and then following up by phone to confirm the details. Another is through sites such as RealtyTrac.com and Auction.com. However, online information is not always accurate.

Properties may be listed that are in pre-foreclosure, because the owner is behind on payments. These properties may never go up for sale because their owners catch up on payments or come to an arrangement with their lenders.

Local real estate agents and brokers can also be valuable resources. Unfortunately, you may not find them eager to help, because agents and brokers do not automatically earn commissions on in-person auctions. However, these realtors can earn commissions through online auctions.

Direct multiple listing service (MLS) reports are far more valuable to potential buyers than online listings because they contain the full data for the listing, including photos and, most important, nonpublic broker comments. This information can cover property defects, financing options, occupancy, and tenant leases.

Important House Auction Tasks

Check for Any Claims, Liens, and Occupants

Before you bid, you’ll want to hire a title search company to see who might hold liens against the property. As the owner, you will become responsible for any liens, which means more money out of your pocket.

There may be other claims against the home—not just tax liens but also contractor liens or a second mortgage. Bidders should check with the auction company to ensure the property has a clear title.

In some cases, the (former) owner or a squatter may be occupying the property, and you will have to evict them. This is often a lengthy process that can be unpleasant at best and expensive at worst. It could be more advantageous simply to offer them several thousand dollars upfront to move out and hand over the keys.

Try To Inspect the House

Auction properties rarely provide potential buyers with the same level of access as traditionally sold properties. You will most likely not be permitted to walk through the property with your agent at your convenience, although some auction companies offer open houses.

The best way to gauge an auction property is to work with professionals—real estate agents, appraisers, and contractors—who understand construction and remodeling costs and can accurately assess a property's current and future value as well as the cost of the work it may need.

Potential Problems

A house could have all kinds of problems—remember, it used to belong to someone who didn't pay the mortgage or property taxes, so the owner probably could not afford any routine maintenance or repairs. Furthermore, once the loss of the home appeared inevitable, the owner may have intentionally neglected it or even seriously damaged it. Left vacant, a property may have also been vandalized.

If you can't afford the risk of buying a property in poor condition, it's best to stick with auctions that allow you to inspect the property before bidding. Without an inspection, it can be hard to know what you are getting into, what a property's repair costs may be, and its actual value until after you become the owner.

Even if you can get a home inspection, there are limits. Problems behind walls, in ceilings, and under floors might not be apparent until you take possession. If the utilities are turned off, you may be unable to detect leaks, electrical problems, broken appliances, or malfunctioning HVAC equipment.

Prepare Financially for a House Auction

Buying a property at auction usually requires a lot of cash. Each auction company and county government has its own requirements for payment, but you will probably need cash just to secure your right to bid.

Down payment amounts and purchasing methods often depend on the property and the auction house. More flexible financing options may be available by purchasing a bank-owned property. Also, be sure to look for and understand the auction fees that you are expected to cover.

If You Win the House Auction

Have Cash or Check Ready

If you've won, you'll need to bring cash, a money order, or a cashier's check for the sum required by the auction holder. Typically, you must pay for the property in full immediately after winning the auction. Occasionally, you may have until the next day to complete payment. Failure to complete the payment may result in forfeiting your deposit and receiving a ban from future auctions.

Finance Your Purchase On Site

Winners go through escrow and closing just as with any other home purchase. For auctions that allow financed purchases, you’ll need to get prequalified beforehand. Some auction houses prefer that you work with their affiliated lenders and will have those lenders on site. However, plan ahead to determine the interest rates available from competing lenders. This information may give you some leverage.

Title

If you win an auction, you’ll want to buy title insurance during escrow or immediately after closing to protect yourself against any liens not uncovered during the title search.

You might not receive the certificate of title for about 10 days. So refrain from doing anything until you hold it. Avoid the urge to start renovations or move into the property immediately after getting your certificate of sale.

Above all, remember that the property is not actually yours until you hold that certificate. The owner could still retain their right to the home by filing an objection to the sale with the court or by paying what they owe.

The Bottom Line

Foreclosed homes may be financially appealing, but there are many obstacles to consider before buying. What's more, just because a home is for sale at auction does not mean you’ll be able to get it at a good price. In fact, the house may be a money pit and not a good deal at any price.

However, for savvy and motivated individuals, property auctions are worth exploring as a way to pick up a home or an investment property inexpensively.

Just bear in mind that auctions are a riskier way to purchase a property than through a real estate agent. So it’s essential to become knowledgeable about the process and the properties in which you are interested. Working with a local real estate agent or broker to identify potential properties might be possible and could help. But they may not be interested unless you can reach a compensation agreement.