Why Should You Purchase a Property at Auction?

Anbarasan Appavu

Looking to buy a property? In addition to traditional channels such as searching real estate listings and working with real estate agents, there are additional ways to purchase property. A property can also be acquired at auction.

Why Should You Purchase a Property at Auction?

• Buying a home at auction is riskier than the conventional method. It is crucial to understand how real estate auctions operate.

•Local governments, real estate agents, and websites such as RealtyTrac.com and Auction.com offer information on home auctions.

• Frequently, auctioned properties do not permit a home inspection or any legal means to personally inspect the interior. If you cannot afford the risk of purchasing a property in poor condition, you should only participate in auctions where the property can be inspected prior to bidding.

• Review and comprehend all auction rules and conduct due diligence on any property you are interested in; for example, check for claims, liens, and occupants prior to placing a bid.

How Buying a House at Auction Works

The advantages of purchasing at auction include expanding your options and potentially receiving a price reduction. You may encounter less competition when purchasing an auction house compared to traditional methods, but you will also be dealing with the different pool of potential buyers, who are typically seasoned investors.

Perhaps the greatest danger of purchasing at auction is that you will have restricted knowledge of the properties up for sale, making costly mistakes a distinct possibility. Also, as with any real estate purchase, you will need to read, comprehend, and sign a substantial amount of documentation (ideally with the help of a real estate attorney).

Real estate lore is replete with tales of homes purchased at auction for substantially less than their market value, and such deals do exist. However, auctions are typically a riskier method of acquiring property than the standard method. Because of this, it is vitally important to be well-informed about how real estate auctions operate and prudent about the properties you intend to bid on.

John Myers, a real estate agent in New Mexico as well as qualifying broker with Myers & Myers Real Estate in Albuquerque says, "Many people incorrectly believe that auction homes are a bargain." Some auction homes can be get in good deals, while others can be costly errors.

Here are the fundamentals of residential property auctions to help you avoid making a costly error, regardless of whether you intend to live in the property or simply use it as an investment.

How Properties End Up at Auction

Two common scenarios can result in a home being auctioned off.

Foreclosure Auctions

When a homeowner has not made mortgage payments for at least a few months, they may default and face foreclosure. When this occurs, the bank records a notice of default with the county recorder. If the homeowner fails to pay the outstanding balance or renegotiate the mortgage terms with the lender, the lender may place the home up for auction and evict the homeowner for nonpayment. These foreclosure auctions are conducted by trustees hired by the bank.

Auctions for Property Tax Defaults

When the owner fails to pay assessed property taxes, a home may also be put up for auction. In these instances, the tax authority, not the bank, seizes the property due to unpaid taxes. The resulting tax lien auction would be conducted by a local sheriff, clerk, or the comptroller's office of the county or local tax authority.

Attending the Auction

Regardless of the type of auction, these events may take place in physical locations such as government courthouses and hotel conference rooms, and they are concluded quickly. Additionally, real estate auctions are increasingly held online, where they can last for days.

According to Earl White, co-founder of House Heroes LLC, a Florida real estate investment company which purchases houses, condos, and residential vacant land, purchasing homes at auction has been and will continue to be popular. "Cost conscious owner occupants as well as the real estate agents migrate to sources which is less competition," he says. "Auction properties gets fewer bids which results in a lower sale price. However, foreclosure auctions do not offer the discounts that were available during the housing crisis."

When there are fewer properties available in the market, buyers are highly motivated to buy due to home appreciation and favorable mortgage rates, White continues. According to him, online auctions have increased competition and caused price increases.

Finding Real Estate Auctions

Contacting local governments directly as well as visiting their websites for information and then calling to confirm the details is one method for locating auctions. There are also websites like RealtyTrac.com and Auction.com. However one should know that all online information is full accurate.

Pre-foreclosure properties may be listed if the owner has fallen behind on payments. These properties may never be offered for sale if their owners catch up on payments or negotiate with their lenders.

Real estate agents and brokers in the area can also be useful resources. Due to the fact that agents and brokers do not automatically earn commissions on live auctions, they may not be eager to assist you. Nonetheless, these real estate agents can earn commissions via online auctions.

Data from Multiple Listing Services

According to White, direct multiple listing service (MLS) reports are significantly more valuable to prospective buyers than online listings because they contain the complete listing information, including photos and, most importantly, nonpublic broker comments. "Non-public comments are significant as they reveal crucial information which affects the sale price and number of days on the market," explains Mr.White. This data may include information on property defects, financing options, occupancy, and tenant leases.

Working with real estate agents, appraisers, and contractors is the best way to evaluate auction property. These representatives of the industry are familiar with construction and remodeling costs and can accurately estimate the property's value and the cost of any necessary repairs.

MLS and county records are typically only accessible to real estate licensees, according to White. However, local regulations vary. In his experience, they are typically willing to assist for free if you contact them.

White also observes that in-person auctions have diminished as even smaller counties have moved them online. In Miami and Palm Beach, tax and foreclosure auctions are now conducted entirely online.

Keep in mind that foreclosure auctions are frequently delayed or cancelled, sometimes at the eleventh hour. The lender may not have received all the necessary documentation, or the borrower may have found a way to avoid foreclosure.

What Bidders Need to Know

Before bidding at an auction for real estate, you should be aware of the risks involved. A regrettable purchase may haunt you for years. You must also comprehend the auction's rules and be willing to abide by them before attempting to participate.

You must register and submit a refundable deposit of 5 to 10 percent of the estimated selling price of the property 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 time and obtain a bidding card, which you will raise when you are prepared to bid.

A property can be won at auction in two distinct ways.

• In a lender confirmation auction, even if you are the highest bidder, the lender is not required to accept your offer.

• In an absolute auction, the property is awarded to the highest bidder.

The starting price of the auction may be the outstanding mortgage balance or a lower amount intended to stimulate bidding. In the foreclosure auction, the lender is not allowed to make a profit. If there is a profit, it is assumed to go to the foreclosed homeowner after the mortgage and all other liens have been paid. Not all auction properties are great deals; for instance, the auctioneer may set a reserve price, which is the minimum amount that must be bid.

Accessing a Property

Rarely do auction properties offer buyers the same level of access as traditionally sold properties. Although some auction companies offer open houses, it is unlikely that you will be permitted to tour the property with your agent at your convenience.

David Roberson, a real estate attorney and broker in San Jose, California with his wife, owns 22 rental properties in three states and operates Silicon Valley Property Management Group.  Before committing legally or monetarily, you or your trusted investment team should conduct a thorough evaluation of both the real estate you are considering as well as the people you are dealing with.

In a similar vein, Humes warns that sources reporting the current or future value of a property may be inaccurate if there has not been an on-site evaluation conducted by professionals who know how to gather and evaluate all relevant information. Working with professionals — real estate agents, appraisers, and contractors — who understand construction and remodeling costs and can accurately assess the property's current and future value and the cost of the necessary work is the best way to evaluate an auction property.

Property Condition and Inspections

Remember, the previous owner was unable to pay the mortgage or property taxes, so he or she probably could not afford routine maintenance or repairs, either. In addition, once the home's loss appeared inevitable, the owner may have intentionally neglected or severely damaged the property. A vacant property may also have been vandalized or inhabited by squatters.

Assume that if the property's exterior is unappealing, its interior is also unappealing. All auction properties are sold as-is, so you must be able to pay for any necessary repairs. In spite of how tempting it may be, you should not trespass to gain a better understanding of the condition of the property. You may have seen flippers on television entering backyards, peering in, and even climbing through windows, but doing so is illegal, and you should not disturb anyone residing in the home out of courtesy and for your own safety. Investigate the property's ownership history by consulting local government records, speaking with local real estate agents, and politely inquiring of neighbors.

Frequently, auctioned homes do not permit home inspections or any legal means to view the interior in person. If you cannot afford the risk of purchasing a property in poor condition, stick to auctions where the property can be inspected prior to bidding. Until you become the owner, it can be difficult to know what you are getting into, what the property's repair costs will be, and its true value without this information.

Even if a home inspection is available, it has limitations. Problems behind walls, in ceilings, and beneath floors may not become apparent until after you acquire the property. If the utilities are turned off, it may be impossible to detect leaks, electrical issues, broken appliances, or HVAC equipment that is malfunctioning.

Payment Options: Plan Ahead

Buying a property at auction generally requires a lot of cash. Each auction company as well as county government has its own payment requirements, but you will likely need cash to participate in the auction. Down payment amounts as well as methods of purchasing frequently depend on the property as well as the auction house. More flexible financing options may be obtainable by purchasing a bank-owned property this same traditional way.

Bidders at an auction must bring cash, a money order, or a cashier's check in the amount specified by the auctioneer. Typically, you will be required to pay for the property in full upon auction victory. Occasionally, you may well have until the next day to complete payment. Failure to make payment may result in forfeiture of the deposit and exclusion from future auctions. Be prepared to provide evidence that you have sufficient funds to complete the purchase. If you are submitting a bid as an entity, such as an LLC, a trust, or a limited partnership, rather than as an individual, you may be required to provide documentation of your entity.

As with any other home purchase, winners go through escrow and closing. The majority of bidders at property auctions are cash-rich real estate investors. For auctions that permit financed purchases, you must be prequalified beforehand. Some auction houses prefer that you work with their affiliated lenders, and these lenders will be present at the auction. However, conduct preliminary research to determine the interest rates offered by competing lenders. This info may give you some leverage.

Ensure that you are aware of the auction fees you will be required to pay. "Homes purchased at auction frequently incur costs and fees from auctioneers, banks, attorneys, and other businesses," explains Humes. It is not uncommon for the buyer to be charged 10% auction fees, bank interest and penalties, attorney fees, 12% sale carrying fees, and property preparation fees. Notably, auctions are not the only way to acquire foreclosed properties.

Check for Any Claims, Liens, and Occupants

Before bidding, you should hire a title search company to determine who may hold liens on the property. As the new owner of the property, you have to be become responsible for any liens, which means more money need from your pocket.

There may be additional liens against the property, such as contractor liens or a second mortgage, in addition to tax liens. Bidders should verify with the auction company that the property's title is clear. If you win an auction, you’ll would want buy title insurance during escrow rather than immediately after closing to protect yourself against every liens not uncovered during the title search.

In some instances, the (former) owner or a squatter will be occupying the property, and you will be required to evict them, a lengthy, unpleasant, and potentially costly process. It may be more advantageous to simply pay them a few thousand dollars in advance to vacate the premises and return the keys.

Refrain from everything until you hold the title. Avoid the temptation to immediately begin renovations or move into the property after receiving the certificate of sale. You will still have to wait approximately ten days to receive your title certificate. Until you obtain this certificate, the property is not legally yours; the previous owner could retain ownership by filing an objection to the sale with the court or by paying off the mortgage.

The Bottom Line

Before deciding to purchase a foreclosed home, there are numerous obstacles to consider. Also, the fact that a home is up for auction does not guarantee that you will be able to purchase it at a reasonable price (or that the home is a good deal at any price; it could be a money pit). However, for savvy, intelligent, and motivated individuals, property auctions can be an inexpensive way to acquire a residence or investment property.

There is much to learn if you are interested in trying to acquire a bargain property at auction. Auctions are a riskier way to purchase a property than working with a real estate agent. It is essential to have extensive knowledge of the bidding process and the properties on which you intend to bid. Working with a local real estate agent or broker to identify prospective properties may be beneficial, but they may not be interested unless you can negotiate a compensation plan.

Lastly, prior to placing a bid, be sure to carefully review all auction rules and conduct a thorough inspection of the property. Consult a real estate attorney, preferably one with experience in foreclosure sales, to ensure you understand your responsibilities and liabilities if you are the successful bidder.

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