Buying a home via auction may sound like a great way to get a screaming deal, but here’s what
you need to know before you go hurtling into buying one. It’s not as great as it may seem…
What Is An Auction Home? – An auction home is usually a home that has had one of two
things happen to it. It’s either a homeowner that has not paid their mortgage for at least a few
months and has fallen into default and then foreclosure. A notice of default is then filed with the
county recorder and if the homeowner does not pay the balance owed, then the lender can put
the home up for auction. Or it’s a home that the owner has not paid the assessed property taxes
on. Either way, it’s usually a complicated scenario that has led to it ending up at auction.
How Does It Work? – In order to buy an auction home, you need to understand the benefits and
negatives of buying at auction. Yes you can expand your options, maybe face less competition
than buying the traditional way, and you maybe will be able to purchase a home at a discount.
BUT, there’s a lot of negatives and things you need to watch out for. For one, the people you are
competing against are usually VERY experienced investors, they have the tools and the money
to fix whatever could be on the inside of the home. The biggest risk of an auction home is you
have extremely limited knowledge of the properties that you are bidding on. You have no idea
what kind of repairs it needs, or if it needs completely condemning! Plus, as with any real estate
purchase, you will need to read, understand and sign lots of paperwork, so you’ll likely need to
hire the help of a real estate attorney.
What Else Do I Need To Know? – There’s a few other things you need to know/be prepared
for. When you arrive you have to register and submit a refundable deposit of 5-10% of the
property’s expected selling price, so it goes without saying that you need a good chunk of cash,
loans are really not ideal here, and if you do want to finance it, you need a lot of other money up
front and need to be fully pre-approved before you go! The starting price of the property may be
the balance owed on the mortgage or a lower amount to spur the bidding. Auction properties are
not always great deals either, sometimes the auctioneer can set a hidden reserve price on a
property which is the absolute minimum that must be bid.You also most likely will not be allowed
to do a home inspection or have any legal way to view the interior in person, which is a HUGE
risk. The property could be in very poor condition, if the house was foreclosed on, it’s likely the
sellers couldn’t afford upkeep. Repair costs get pricey!
The bottom line is, auctions are VERY risky. You may not get a great deal, and even if you are
able to, you don’t know what condition the property is in and could end up spending a fortune to
fix it up. Unless you’re an investor who knows what they’re doing, or you have a lot of
disposable cash, it’s best to steer clear of auctions and focus on finding a great deal elsewhere.
