Apart from the traditional ways of acquiring a property- checking real estate listings, working with real estate agents- auctions are another option for purchasing a home. Most real estate investors purchase homes by this method. Here is some basic information about residential property auctions to aid your decision to invest in the property or to just live in it:
How do Properties End up at Auction?
The major types of property auctions are foreclosure auctions, conducted by bank-hired trustees and tax lien auctions, held by local sheriffs. Before a property reaches auction, first and foremost, the homeowner falls back on his mortgage payments. If he doesn’t pay up the balance owed or renegotiate with the lender, the home can be put up for auction. It can be a few months to a year time from when the homeowner stops paying the mortgage to when the home ends up being auctioned off. Also, if the owner falls back on paying property taxes or becomes delinquent on state or local income taxes, the bank (unpaid tax authority) can seize the property.
How Property Auctions Work
Locations for auctions are usually chosen by auction companies like local government courthouses, hotel conference rooms or even online. If the lender is privy to the auction, then he determines the winning bid although he might refuse to accept your offer even though you are the highest bidder. In an absolute auction, the winning bid gets the property.
The balance left on the mortgage is usually the starting price of the auction or might be a lower amount designed to encourage fast bidding. The lender does not benefit from the auction in a foreclosure auction. Usually, the properties are sold at a loss but it goes to the homeowner if there is a profit, just after the mortgage and other liens are paid.
For potential bidders to determine the properties, they are likely to bid on the highest price they can pay. Some auction offices host open-house so the bidders can get acquainted with the properties beforehand. Listings describing the properties to be auctioned are also available. Prospective buyers can check country recorder websites and foreclosure listing services to check for properties that will be auctioned off.
As regards payment, bidders should carry a cashier’s check to the auction for the amount required by the auction holder. Winning bidders will pay the necessary auction fees and a deposit of a down payment on the property before leaving the auction venue, after which they would go through escrow and close the deal like any other purchase. Most bidders are real estate investors who can afford to pay cash. However, it is wise to get prepared for auctions that permit financing. Some auction houses have affiliated lenders and encourage bidders to work with them.
Usually, really valuable properties are purchased at auctions. Prices tend to be lower because very few people show interest in the property (it’s not available through the normal channels) and because of the risks inherent. Auctioned properties are not the best deals but it compensates for the many demerits of purchasing an auction property.
If a property is being auctioned off, it suggests that the owner was having financial challenges and also, there might be a lot of maintenance problems and there might even be other liens against the property: tax liens, contractor liens or a second mortgage. Bidders, in collaboration with auction houses, can avoid this problem to ensure that the house has clear titles.
A lot of cash is required when buying a property at an auction as each auction company has different requirements for payment. A down payment no matter how small would be required in order to secure your bid. However, down payment amount and purchasing depends on the property and auction house so you might as well get a cashier’s check (for the lowest bid amount of the property that you’re interested in). Better financing options exist when purchasing a bank-owned property the customary way than at an auction.
You might not be able to purchase the property even if you win the auction especially when it comes down to lender confirmation foreclosure auction. Also, the auction can have a hidden price that limits the lowest acceptable price. So, to avoid any surprises, get acquainted with the auction terms ahead of time.
To avoid the risk of buying a property in a bad state, go for auctions that permit inspections before the bidding process as most auction properties hardly allows for a home inspection. This is essential so that you know the true value of your property and the total costs of repairs and maintenance that you might have to make.
In addition, in a few cases though, the former owner would have to be evicted by you, the current occupant, which would eventually turn out to be quite an unpleasant experience.