What’s better than buying your dream home? Buying your dream home at an amazing price. Maybe you’ve heard tantalizing tales about buying real estate way below market prices at auction. But there’s plenty to know before embarking on this untraditional path to homeownership.
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Buying at auction, particularly a foreclosure auction, is high risk/high reward. Research is key. It isn’t easy, but it isn’t complicated, either. “You just need to be willing to put in the effort to do all the steps. To buy one house, you might have to research a hundred,” says Aaron Amuchastegui, co-author of “Bidding to Buy: A Step-by-Step Guide to Investing in Real Estate Foreclosures.”
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Because few potential homebuyers know about homes that are up for auction and even fewer can afford to participate, buying a house at auction can mean huge savings, because competition has been reduced.
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On the other hand, buyer’s remorse can strike hard and fast if you’re in over your head, don’t do due diligence, or have terrible luck. “I've seen someone buy a property thinking there was a house on it, but the house was demolished by the city two days before,” Amuchastegui says.
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Your local government and newspaper are good sources for leads on foreclosure auctions. Or for a browsing bonanza, check out nationwide sites such as Auction.com, RealtyTrac, Bid4Assets, and Hubzoo.
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These days, all kinds of motivated sellers choose to put homes up for auction. Want to find a great deal on a luxury property? You may be just a few clicks and a few million dollars a way. Sites such as Elite Auctions specialize in getting fancy homes sold within a tidy timeframe.
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While private auction houses might host open houses, many foreclosure auctions don’t allow bidders to inspect a property ... like at all. An old roof? A bad foundation? Termites? Water damage? The winning bidder is on the hook for all of it. “The condition of the property is a series of detective work and guessing,” Amuchastegui says.
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When a property’s interior is off limits, checking out the exterior becomes that much more important. Keeping in mind trespassing laws, investigating the outside of a house could give you some clue about its overall shape.
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While rules vary, often the winning bidder of a live foreclosure auction will be required to pay in cash. Because it takes so much money on hand to bid, participants are typically high-rolling, experienced investors.
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Frequently, a large refundable deposit is required before you can raise a paddle with the big guns. The auctioneer needs to know that you’re a serious bidder who can afford to follow through if you win.
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In certain states, the original property owner has a window of time to swoop in and re-buy the house from the winning bidder, a right of redemption. Another way the highest bidder could be out of luck? If a reserve was set and not met.
Most foreclosure auctions still take place live on the proverbial, or actual, courthouse steps. But the number of online auctions is growing fast, with the pandemic accelerating this trend. And while it might feel perversely thrilling to buy a home from your iPhone, online auctions can mean more competition and thus higher prices.
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At a foreclosure auction, if nobody bids on a property or the reserve isn’t met, the home is turned over to the bank to sell as an REO, a real estate owned property. That means a losing bidder might have a second chance to strike a deal when the bank lists the house or puts it up for auction … the next time.
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Just like auditing a class or a test driving a car, it’s wise to attend auctions as a spectator before jumping into the auction game. Property Radar, a pay-for-use real estate research site, also encourages “practicing on paper” first: Investigate a property, set an imaginary minimum and maximum bids, and follow up to see what the actual winning bid was.
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Once you’ve identified a property you’re interested in bidding on, you’ll want to know all you can about it. A title search, which a title company can run for as little as $100, will reveal whether there are liens on the house that could fall to you, such as unpaid property taxes.
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You may be unpleasantly surprised to discover that a house you just bought at auction is not vacant. If the previous owners or squatters refuse to leave, you might have to lawyer up to get them out.
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Despite the risks associated with buying a house at auction, there are major perks, such as being among the first to know about a hot property and the speed of the transaction. It might take months to negotiate the terms of a traditional real estate deal, while an auction sale happens at the drop of a gavel. (It could be several more weeks until the closing.)
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Plenty of real estate insiders caution against buying a home at auction unless you’re a seasoned pro. “There are so many things that can go wrong,” says Adam Sikorski, a broker for Compass in New York. “There are better opportunities to target stale or expired listings with a strong local broker.” But if you educate yourself and really do your research, who knows? Amuchastegui says, “I've seen newbies get rich and experienced investors lose.”
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