Buying A Home At Auction
But there are other ways that homes are sold, and auctions are one of them. There are two main ways that a house ends up at auction: through foreclosure due to missed payments or defaulting on tax payments.
buying a home at auction
Foreclosed properties are sold at auction. These homes are seized by a mortgage lender after a borrower fails to make mortgage payments for a set period of time. This process begins after several months of missed payments. Before a servicer can proceed with the foreclosure process, the loan must be at least 120 days delinquent, with some exceptions. Servicers are required to make efforts to contact the borrower with alternatives to foreclosure to help them stay in their house if possible.
Absolute auctions attract the most bidders because there is no minimum. This is also the preferred method of most lenders and government agencies. All sales are final, meaning there is no room for the seller to back out in the face of a too-low bid.
In an open auction, bidders know the amount of any other bids that have been made. Bidders like open bids, because they can see what the competition is doing and raise their bid gradually, as needed. If there is no competition, a lowball bid might just win. On the other hand, open bidding can result in bidding wars, and sometimes sellers reap a windfall.
Why? Because in the auction process, the lender is looking to cut their losses by recouping the balance due on the mortgage and their costs to foreclose. The same is true for municipalities with a tax lien in place. Their interest is in coming as close as possible to having the tax bill paid and their costs recouped.
In the vast majority of real estate transactions, home buyers are legally offered consumer protections, lenders are required to make disclosures, and real estate agents must advise you as they would advise themselves. In the auction situation, none of that applies. In addition to having little or no access to the home you wish to buy before you bid, you are responsible for doing your due diligence to make sure the title is held free and clear.
Of course, the mortgage lender, and probably the taxing authority, have liens in place, but you have to make sure there are no other liens, as in the case of a home equity loan in default or unpaid homeowners association (HOA) fees. If there are, you will be responsible for paying those liens off when you acquire the title to the property.
Even if you win at auction, you can still lose the house. If the owner is suddenly able to bring their mortgage current, work out a forbearance plan with the lender, or negotiate a short sale, you will walk away empty handed. Until you receive the title with your name on it, which usually takes about 10 days after the auction ends, you have no guarantees.
These are loans that are high interest and short term, and generally unsuitable for auction bidders who plan to live in the home. These loans make sense for property flippers, whose business it is to fix up and sell their auction buys as quickly as possible, paying off the loan, and pocketing their profits.
In a delayed financing loan, you pay for your home upfront, as in the case of an auction purchase, and then immediately refinance the home to take the equity back out, presumably to buy more houses. It could also work if you borrowed money from friends or family to make the initial purchase of an auction property and need to repay those loans.
Essentially, you will have to meet the appraisal and home inspection requirements, so a lot will depend on the condition of that home. It might be impossible to get that financing if the home turns out to be in worse shape than you imagined.
Figure out what you must pay for an auction property to make it worth your while, either as a homeowner or an investor. It can be difficult to stick to, especially in the case of a bidding war, when emotions run high. But if you know exactly when to walk away, you will avoid overpaying for an auction property.
All risks are on the buyer in the auction situation, so there is no one to look to for financial assistance should the problems in a home, or in its legal status, be greater than you thought they might be. Even the best-kept home can harbor serious problems within its walls.
If a homeowner has defaulted on a second lien, the first lien for the primary mortgage is probably not far behind. Your purchase will always be subordinate to the first lien, which could foreclose and wipe out all subordinate liens.
Homes sold at auction are typically in pre-foreclosure, foreclosure, or have some type of lien on them because the owner fell behind on their home loan with their mortgage lender. As a result, the properties are often in distress.
Buying a home at auction is a completely different experience from buying a home the traditional way. The type of person who might want to try buying their property via auction is often financially savvy and can afford the risks that come with an auctioned home.
Some auction properties allow for inspections by appointment. However, property inspections are not always allowed on auction properties, especially occupied ones. Not being able to inspect a property before purchase puts you at a major disadvantage.
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Homebuilders may auction off a group of homes to sell them all at once. Usually, this happens when the homes have sat on the market for a while without a lot of buyer interest. But again, this is rare in a hot housing market.
Work with your bank or lender ahead of time to ensure your finances are in order and get pre-approved for a mortgage so you know how much you can afford. Also, remember to set cash aside for repairs since homes sold at auction may need serious work.
First, start with the market value, which is what the house would be worth in pristine condition. That would be if the house is ready to move into, has beautiful landscaping and top-shelf curb appeal, and the sellers have taken the time to stage the house with a fresh coat of paint and new floors. But, as we mentioned earlier, a house being sold at auction is rarely in top condition, so you bump the value down to 80% of market value, then subtract the cost of repairs.
Start with the market value, which is what the house would be worth in pristine condition. A house being sold at auction is rarely in top condition, so bump the value down to 80% of market value, then subtract the cost of repairs.
Some larger auctions will have representatives from several large mortgage lenders in attendance. Bidders also need to be aware that large auction firms, such as Williams & Williams and The National Auction Group, charge either a flat fee or percentage of the sale price for their services.
Another way that properties end up going to auction is due to unpaid property taxes. The tax authority eventually takes control of the property and puts it up for auction to pay off after the tax lien. This auction is typically handled through the local jurisdiction or tax controller.
Sometimes, the property owner simply wants to unload the property fast and as-is. Sales on auction markets often go faster than on the traditional market, which is desirable for some property types. Large, expensive homes can be sold this way, but it is more commonly seen with houses in disrepair.
The biggest reason investment-minded individuals take this risk is the chance for a bargain. Houses can go for low prices at auction. Even with considerable repair required, that can be desirable for those who want investment properties, but cannot secure properties priced at market value.
Ready to expand and expand fast? Auctions go fast from bids to closing, which can be very desirable. The ability to get started on your next investment project right away rather than going through a lengthy escrow period and closing process is great motivation for many landlord buyers at auctions.
Finally, learning from the experience and experienced investors at auctions can be enlightening. Seeing the prices paid, the bids placed, and the types of properties that draw the most interest will help you understand what experienced buyers find most enticing. This can be good for finding bargains yourself and learning indicators of a good buy.
Auctions are a different buying process than traditional sales. Suppose the property is a foreclosure or otherwise seized asset. Be sure to read all paperwork clearly, and work with a real estate attorney if possible so that nothing is missed. The purchase terms will ensure you are protected as much as possible.
Cash is often required for home auctions, meaning you must have a large amount of cash on hand. While some auction houses allow financing options, they may be more limited or at higher interest rates than you are used to. This is a big investment, so you should be careful about getting in over your head.
Houses at auction are typically sold unseen. Depending on the type and terms of the auction, there may be various pictures showing the inside of the house, but it will not be as thorough as you would see in person.
Additionally, you will not be receiving or seeing a house inspection before buying. That is why the process is too risky for many investors, but it is also how you can get something amazing at a low price.
No; you will be working directly with a third-party institution like a bank, a broker, or the auction house selling the property. Real estate agents are not part of this process. You will see necessary financing and title company employees as the sale closes, but you do not need to worry about securing a real estate agent to bid at an auction.
It is possible to finance a house bought at auction in some cases. Ultimately, it is up to the group selling the house to decide what will and will not be accepted. Many auction houses allow financing and may even have their preferred lenders on-site at the auction to set up the financing for buyers. 041b061a72