The Risks and Benefits of Buying Home At Auction
November 26, 2021
Auction houses are a great opportunity to buy a house at a lower cost. Auctions do come with a few risks and might require a little more effort upfront. However, the reward is something that you’ll cherish for years after.
The key is to make the auction work for you, which is why you need to be well educated about the auction process and the risks involved.
In this blog post, we will go through how the house auctions work, the risks involved, and the benefits of buying a house at an auction, so that you can decide if this is the best option for you.
How Does The Real Estate Auction Process Work?
One of the first questions that might come to your mind is – how does a house end up at an auction? Well, there are two scenarios in which a house generally ends up getting auctioned.
1. Foreclosure Auction
The first is when a homeowner fails to pay mortgage payments for a few months and the lender decides to force the homeowner out of the house for nonpayment. In such a scenario, the bank can put the house for auction. These are called foreclosure auctions.
2. Property Tax Default
The scenario is when an owner fails to pay the assessed property taxes for the house. When this happens, the tax authority can force the owner out of the house by auctioning it.
But, How Do You Find Real Estate Auctions?
The City Hall’s office is one of the best resources to find information about properties being auctioned. Since a notice of foreclosure is recorded with the city hall’s office, you can search through the public records to get information on upcoming auctions around you.
It is also required by law for banks to publish the notice of pending foreclosures in local newspapers. Lastly, local real estate agents can also be a good source of information about house auctions.
Once you have the information about the houses available for auction, you can get your financing in order to prepare for the auction day and bid for the property. Preparing your finances is imperative because you have to pay immediately if your bid wins, unlike traditional real estate deals where you have more time to pay.
Now that you have an idea of the auction process, let’s take a look at the risks and rewards of the process.
Benefits of Buying a House at Auction
1. Lower Purchase Price
The biggest benefit to buying a home at auction is the chance to get a house at a great price.
The selling price of a house in an auction is the amount that the owner owes to the bank/mortgage lender or the tax authority. Technically, you can get the house at this amount, which can be as low as just a few hundred dollars.
2. Faster Process
Another great thing about buying a home at auction is the speed of the process. Whereas a typical real estate deal can take months to complete, house auctions can be completed in a matter of a few weeks, if not a few days.
If your bid wins, you can provide an initial deposit on the day of the sale and pay the remainder in the next few days to legally own the house.
3. Lower Competition
Real estate auctions attract a significantly smaller number of people when compared to the traditional method of buying a property. Competition varies from auction to auction, but overall the pool of people who are interested and familiar with the real estate auction process is relatively small.
4. Transparent and Straightforward
Most importantly, the process for buying a home at auction is pretty straightforward and transparent. You don’t have to spend time researching and visiting several houses or neighborhoods. Nor is there any complicated documentation required to participate in a house auction.
You only need three things to be able to bid on a property:
- A valid ID proof
- Details of your solicitor
- Means of paying a deposit (banker’s draft, deposit, check, or debit card)
5. Auction’s Are Fair
When buying a house at an auction, you aren’t pressured to make the first offer unlike all of the other traditional processes for buying a house. There’s no scope of unfairness as you can see every offer being made, and can clearly see how much more to bid to overtake the highest offer.
The Risks of Buying a House at Auction
1. Inaccurate Information
Unverified information is one of the biggest risks when buying a house at an auction.
The entire process takes place quickly and you have a short window of time to arrange for a property survey or legal check.
For example, pending liens on the house can become a huge problem. A lien is a legal notice attached to a property because of an unpaid debt. The unpaid party typically has a legal claim to your property and can even prevent owners from selling.
There can be multiple liens on a house. During the foreclosure process, some of those liens might be removed and others may still be pending. As the new owner of the house, it becomes your responsibility to pay those liens. Failing to do so may lead to serious legal consequences, and you may end up even losing the house.
However, liens are public record and a simple search can uncover any liens on your property or any others. To find out if there is a lien on a property you can search for an address on the county clerk, recorder, or assessor’s office website. You can also ask the office directly about any liens for the property.
2. Inability To Conduct a Home Inspection
When buying a house at an auction, you get the property in ‘as is’ condition. You don’t get a chance to take a walk through the property or conduct a home inspection of the house.
So, there’s no possible way for you to know the actual condition of the house before buying it, making it a huge financial risk to take.
3. Risk of Illegal Occupants
As many real estate properties sold at auctions are vacant, it’s common for properties to have occupants living inside the house illegally. These occupants could be anyone including the previous owners. Since the new owner’s responsibility to evict those occupants, it’s important to practice caution when interacting with the occupants.
Another important note is that occupants of a vacant house can claim ownership of the property if they have lived there for 7-21 years. This is called adverse possession laws and they vary state to state.
4. Preparing Your Finances Beforehand
In certain cases, you might be required to make a refundable deposit to earn bidding rights. The deposit amount is generally 10% of the house purchase price. This means that you will need cash before even starting the auction process.
Even if you are seeking the option to finance the house (which is less common), you will still need an earnest money deposit, the initial amount of money you pay to the seller, available at the time of the auction.
The Final Word
In all fairness, buying a house at auction is not for the faint of heart.
Things move fast in an auction, so you have a fairly limited time for due diligence. This is the reason that the key to auctions is to gather as much information about the house you intend to bid on for before the auction.
It can be valuable to visit the property to get as much information if you can. By understanding what you are getting into, you can mitigate the risks involved in the auction process and buy the house of your dreams.
So, ready to go house hunting?