If you are a first-time homebuyer or a novice investor, buying a foreclosure at your local county auction or online is generally a bad idea. Real estate auctions are growing in popularity, but this is where experienced investors come to play. If you don’t know what you are doing, you can easily find yourself on the losing end of a deal. There are two ways for buying a foreclosure at auction, online through websites such as auction.com, or your local county courthouse.
Types of Auctions
There are three basic types of auctions:
In an absolute auction, a property is sold to the highest bidder, regardless of price. Absolute auctions do not have a reserve price or required bid amount for the item to be sold.
In a reserve auction, the final bid can be rejected by the seller, if the reserve price isn’t met. When buying a home at a foreclosure auction, a reserve is commonly used. A reserve is used because lenders try to recoup most if not all of their losses from the sale of the foreclosed home.
Minimum Bid Auction
In this type of auction, the minimum bid is disclosed to the bidders. For you to participate in the auction, you must start bidding at the set price. Sellers like this auction format because it reduces the risk of losing money.
What Types of Properties Are Sold at Auction?
Any property type or asset can be sold at auction, but most people are familiar with foreclosures. The type of real estate properties at an auction includes single-family homes, commercial properties, real estate notes, multi-family homes, and land. Auctioned properties include:
- HUD Homes
- Tax Liens
- Non-distressed real estate owned properties
Pros and Cons of Buying A Property at Auction
So far, we have covered the types of auctions and what kind of properties can be purchased. But what are the benefits and risks of buying an auctioned home? Just like any other real estate investment, you need to know what you’re getting into.
- Great price: The number one reason investors buy properties at an auction is because of the potential savings. You could easily walk away from an auction with a property discounted by more than 25 percent of fair market value.
- Less competition: As we stated before, auctions are frequented by savvy investors. In comparison to the MLS, where a house might get hundreds of views and multiple offers driving up the price.
- Return on your investment: If you can buy a property way below market value, you have the potential for a huge payday.
- Speed: One of the main benefits of buying at an auction is the speed at which the process can be completed. Whereas buying through a real estate agent can take months, an auction purchase can be completed in days.
- As-is condition: You are buying the property as-is, you’re going in with not much information on how sound the structure is. You also won’t be able to inspect the property before your purchase. So, hiring an inspector is not an option. This is one of the reasons why novice investors should stay away from auctions.
- High repair costs: For the most part, you won’t know what you have purchased until you get the keys and open the doors. Some properties might look great on the outside but are damaged inside. Many disgruntled homeowners facing foreclosure intentionally damage properties to spite lenders.
- Liens: When you purchase as-is, you get the house and any liens placed on it. Therefore, it’s in your best interest to have a title search done to ensure the house is free and clear.
- Occupied home: It might not happen that often, but you run the risk of buying a home with occupants in it. You could find that your new investment includes runaways, professional squatters, and drug addicts, to name a few.
- Delayed Possession: Occasionally, banks may delay the process of the sale. Banks are known to drag their feet considering an offer or completing the necessary paperwork. So, have some patience and understand that this is sometimes part of the process.
- Upfront cash: In almost all auctions, live and in-person, you need to be prepared to pay with cash or certified funds. This fact alone separates the fly by night investor from the professionals.
Bottom Line on Buying a House at Auction
If you are looking to purchase a house at auction as a new investor or first-time home buyer, the auction isn’t a good option for you. We are not saying it’s impossible, the risks just aren’t worth it. Keep in mind that every home at an auction isn’t a good deal. It takes individuals and teams familiar with the process to make it work.