Home prices are up 8.6% year-over-year compared to August 2020 and 19.6% over August 2019, according to the National Association of Realtors. Homes were already unaffordable for millions of Americans before that, and now you might be wondering: Is it time to buy a home at auction, given the rock-bottom prices of yesteryear?
Buying a home at auction can be a winning strategy for some. However, it's often more the realm of real estate investors who can deal with the lightning-fast nature of the process and cash-only purchases. Read more to see if you're able to handle these hurdles.
Why Homes Get Sold at Auction
Homes can be sold at auctions for several reasons, but here are some of the most common:
- Tax liens: If someone quits paying property taxes, local governments can seize the property and sell it at auction just the same as lenders can if someone stops paying their mortgage.
- Bank foreclosures: Foreclosed homes can be put up for sale on the traditional market, or they can be sold at auction.
- Quick sales: Sometimes people just need to sell a home quickly, such as after the owner passes away, a divorce, moving away, etc.
“Homeowners may also elect to sell their properties on any of the many auction websites,” said Realtor Dana Peterson of Sheldon Largent Realty in an email to The Balance. “These are not usually foreclosures, but homeowners looking to obtain the highest bid possible.”
How Auctions Work
How an auction works can vary widely depending on where you live and the specific auction you attend. That's why it's important to research how auctions work in your area. City and county websites are usually great places to find out about local procedures, Peterson said.
Most auctions will have a listing of upcoming homes available, with varying amounts of information. You'll need to scope these out ahead of time to figure out which properties you're interested in.
You generally cannot inspect a home or even set foot on the property before the auction starts. A drive-by is about the most you can do, but even that can tell you a lot, Peterson said. “A good rule of thumb is to assume the interior is maintained similar to the exterior.”
Auctions can take place either in-person or online. On the day of the auction, you'll need to register and you will likely need to make a refundable deposit to show you're a serious bidder.
If you're the highest bidder, you'll generally win the home. You'll be expected to pay in full immediately after you win the auction. After that, you'll receive a certificate of sale, but you'll still need to wait to receive a certificate of title, just to give the current homeowner one last chance to keep their home. After that, the home is officially yours.
Types of Auctions
There are three main types of auctions:
- Absolute: The highest bidder gets the home, with no starting bid price. If you're the only bidder and you bid $5, you get to buy a home for $5.
- Minimum bid: Again, the highest bidder wins, but there is a starting bid price. If no one bids, the house isn't sold.
- Reserve: The seller gets to choose whether to accept the high bidder's offer or not. This means you could be the high bidder and still have your offer rejected.
Pros and Cons of Buying a House at Auction
May be able to buy a house for very cheap
Generally need to pay in cash
Finding good deals can be difficult
Homes can come with unpleasant surprises
- May be able to buy a house for very cheap: How much you may save over buying a home via the traditional market is not a simple question, Peterson said. If you know local property values and understand what you’re getting into in terms of repairs and rehabilitation, you can find deals.
- Generally need to pay in cash: Banks generally don't finance home purchases at auction. You may need to be prepared to pay the entire price in cash immediately after the auction.
- Finding good deals can be difficult: There isn't a one-size-fits-all MLS you can search for properties as you can with the traditional home market. You'll need to put in a lot of legwork to research properties and markets.
- Homes can come with unpleasant surprises: Since you usually can't inspect the home first, you could end up buying a home that comes with other liens you must pay, occupants you'll need to evict, or a lot more repairs than you're able to afford.
Tips for Real Estate Auction Success
Auctions can be stressful, but here are some tips to help you keep your cool:
- Cast a wide net: Don't limit yourself to the first auction you find; there are many potential auction sources. Use a service such as ForeclosureRadar or Auction.com to locate homes for sale at auctions from a wide range of sources near you.
- Research each property beforehand: You can't inspect each property, but you can still get creative with your research to find out more about it, such as from old Zillow or MLS listings, title searches, and other sources. Don't just show up at the auction to bid on random property.
- Have a walk-away price for each property: Know what your maximum price is for each property you expect to bid on. This will help you keep your emotions from signing you up for a larger purchase than you intended.
- Research how auctions work in your area: Each auction works differently, and each location has its own rules for how auctions work. Attend auctions before you plan to bid to see how they work, and know exactly what happens after you buy.
- Know what you’re bidding on: With a foreclosure auction, “you are not bidding on the property, but on a lien,” said Peterson. “Being the highest bidder does not guarantee you free and clear ownership of the property.” Research the property with a title company to verify the nature of any liens or other issues. And if it’s a rental, be prepared to make a “Cash for Keys” offer to help the tenant move out and find a new place.
Frequently Asked Questions (FAQs)
How cheap can you buy a house at auction?
How much you can save varies on your local market, the condition of the home, and other factors.
What kind of loan would you get to buy a house at auction?
You generally can't use a loan to buy a house at auction. Most auctions require you to pay for the house in full, and in cash, after you buy it. However, some home auctions may allow for financing with "hard money" loans at high interest rates, designed for real estate investors.
Who does the closing if you buy a house at auction?
The closing is usually done by an agent hired by the home's seller. For example, if you buy a HUD home at auction, the closing will be done by a HUD agent.