The Definitive Guide to Buying a House At Auction
When buying a house at auction, you potentially have the opportunity to purchase a house at a dramatically reduced price than what the current market value is. There are many different reasons why homes go to an auction for sale but the end result usually is the same.
The property is undervalued and buying a house at auction will leave you with a potentially good property with a lot of equity.
Many investors like to buy properties at an auction because of the reduced price. Some people have even purchased homes for pennies on the dollar. Now those are rare but you can still do very well with buying properties nearly half of their current market value.
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What Are Real Estate Auctions And How Do They Work?
Real estate auctions are great ways to find every type of property at a discounted value. Investors who can utilize auctions to acquire properties will pay dramatically less for a property than on the open market.
Properties that will come for sale would be commercial properties, multifamily properties, single-family homes, and sometimes some real estate notes.
The reasons for these properties to come on auction are things like foreclosures, short sales, non-distressed REO’s, and HUD properties.
All of these auctions are either in person or can be found online. The in person auctions are much more exciting because of the fast pace of the bidding with an auctioneer taking bids. Even if you never want to bid on the property, it is fun to go and watch these auctions take place.
If the auction is an in person auction, it will be over in less than five minutes. If you show up late to the auction, it will be over and you will miss out on the property. Online auctions on the other hand go for days or weeks allowing many bidders to bid on the property.
Bidding Competition
In either case, there will be a competition to be the highest bidder before the auction closes for the property. Once the highest bidder is found and there are no other bids, the auctioneer will close the bidding an award the winner the property.
All auctions are different but there will always be a deposit that must be paid by the winning bidder in order to secure more time to get adequate funding. Usually the deposit is anywhere from 5% to 10% of the winning bid.
The balance of the amount due is usually do within 30 to 45 days depending on the auction.
This gives the investor time to use regular financing to purchase the property. You do not need to have all cash in order to purchase the property, but you need to be able to make the full payment before the payment window closes.
Word of Warning for Buying A House At Auction
Buying a house at auction is an advanced strategy for advanced investors. Many people have gotten into big trouble buying homes that were problems in the end.
Here are a few things that could potentially make a property a bad one to buy at an auction:
- Overpaying for property
- Accidentally bidding on and purchasing the wrong property
- The property is in worse shape than you realized
- Not properly estimating the cost to rehab the property
- Foundation issues that cost thousands of dollars to repair
- Buying a property you have never seen and know nothing about
The biggest issue with buying a house at auction is that you cannot go inside the property to inspect it. You are taking a big risk when you buy a property without knowing what the inside of the property looks like.
And you can drive by the property usually to see the outside, talk to the neighbors, peak in the backyard, try to see through the windows, and do anything else that you can to see if this is a good property for you to buy.
Nothing compares to actually going inside the property and viewing it in person. Be careful when you are buying a property at auction.
As Is, Where Is, And All Faults
In any auction, there are no warranties to the condition of the property. So there is no way for you to go back to the seller and demand than to fix something. When you buy the property at an auction it is an as is where is sale.
As Is…
When the properties being sold as is that means there is no warranty or guarantee on the condition of the property. You buy it exactly as it is.
Even if you find something wrong with a property five minutes after you buy the property, there is no going back. There’s no one that you can go after to try to get any money out of them.
Where Is…
When looking at a property, real estate is attached to a section of land. That land is valuable in itself and then you have the improvements that are attached to the land.
When you buy the property “where is” that means that there is no recourse for any location or issues with the property and land. If there are any liens on the property, if there are any back taxes on the property, or any other issue with the land, those are yours to do with after you own the property.
And All Faults
All properties you buy will have certain faults to them. Large or small they come with the property. When you buy a house at auction, you get the property with every fault that comes with.
You are not able to go back to the auctioneer, seller, or bank to ask them for any money in reparation for the problems with the property.
Types of Auctions You Will Encounter
Absolute Auction
In an absolute auction, the highest bidder wins the auction. When the bidding process opens up, everyone who has registered to bid has the right to place their bid on the property.
There are no minimum bid so if you win the property for one dollar, you win!
After all of the other bidders dropped out, and you have the highest bid, then you just won the auction and you are now the owner of the property. (After you pay…) Once the bidding is closed, the sale is final and there are no other bids allowed.
Usually there are no minimum bids on the property but sometimes a bank might start with an opening bid of a dollar amount that they want to make sure the price is not go below.
Banks and government agencies predominantly use this sort of auction to unload unwanted properties.
Minimum Bid Auction
In a minimum bid auction, the seller picks a minimum dollar amount that they require all bidders to bid more than. The minimum bid auction is where you have to bid the minimum amount in order for the bid to stand.
Before the bidding processes opened, the auctioneer will indicate what the minimum bid will be.
This is a huge draw for sellers to sell their properties at an auction because they can set their losses and a certain dollar amount.
If a seller wants to sell the property for $200,000, they may set the minimum bid at $180,000. This makes sure that they will not have the auction for anything lower than $180,000.
The downside is that having a minimum bid may detract some buyers from bidding on the property. So it is a fine line with having a minimum and putting it well enough to attract bidders.
Reserve Auction
In a reserve auction, the winning and highest bid is treated as an offer to the seller to purchase the property. The seller has the right to accept or turn down the offer as they desire.
The bottom line is that they do not have to sell the property if they do not feel the price is right.
This is obviously very beneficial for the seller but it will bring in less people who would want to bid on the property. It’s much more appealing to bid on a property knowing that you can get it for a crazy cheap price than if you need to go through all the work of bidding and potentially not even be able to buy the property.
Reasons Why of Houses Are At An Auction
REO (Real Estate Owned)
When a person buys a home with a mortgage, the bank puts a lien on the property in the first position. It shows that the owner still owes money on the property and gives the bank legal recourse to take back the property if the borrower does not pay the mortgage.
If the borrower defaults on their loan, the bank goes through the foreclosure process. After the process is finished the bank is the 100% owner of the property. This is called REO or real estate owned properties. It basically means of the bank owns the real estate.
Properties that are foreclosed properties go to auction. Whoever has the winning bid will in the property and become the rightful owner.
For Sale By Owner
Sometimes, and owner believes that they can make more money if they sell the property at an auction. That or it could be that the person needs to sell the property quickly. Whatever the reason is, you will have owners sell their property at an auction.
In my personal opinion, I don’t believe you will get more money for property at an auction then if you listed on the multiple listing service with a realtor. The big reason why is there are fewer buyers of the property since not many people prefer to go to an auction to buy properties.
Most people prefer to buy a property through a realtor because the realtor takes care of all their paperwork problems and issues. You will get more investors at auctions and thus lowering the amount of money you can get for the property.
Tax Lien
If a homeowner neglects to pay their property taxes, the local government has the full authority to take the property and everything on it. They are basically taking the land and whatever is attached to the land.
The only goal for the local government is to get their taxes paid in full and make the property current. Since it is a government institution, they are not looking to make extra money over the total taxes due. This can be a great opportunity for you as an investor.
If you can acquire properties by just paying the back taxes, you have a huge opportunity to get a property for pennies on the dollar.
Imagine a homeowner who lost their job and where no longer able to pay their taxes, then their property is put at auction by the local County government. Some properties have sold for $5000 in back taxes for a property that is worth hundred and $150,000. I will say though that these properties are very hard to find and will have a lot of other investors going after them.
HUD Properties
HUD properties are from the Housing and Urban Development department of the United States government. These HUD homes are financially backed mortgages by the HUD department
Instead of a REO foreclosed property that a bank is turn auction, this is the HUD department auctioning off properties that are given back to the HUD department. Basically instead of a bank it’s the HUD department putting up a property for auction.
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Finding Auctions for Properties
The first question always comes up is: “where do I find the auctions”?
This all depends on where the property is and who is conducting the auction. There are physical, in person auctions, and online auctions. Physical auctions will be very fast paced and can be over in a matter of minutes while an online auction can last weeks at a time.
Physical Auctions
There are both physical auctions and online auctions for properties. For the physical location for most auctions will be at the local County Courthouse. Whatever jurisdiction the property is located in will be where the auction will be held.
The auctioneer will commence the bidding and anyone who qualifies can bid on the property. There is really nothing special about the auction and there is nothing to worry about. The only worry is that you are buying the right property at the right price.
There will be a few other investors there at the same time so the bidding will be intense if more than one person is bidding on the property. And if it is a good property there will be more than one person bidding on the property.
In-Person Buying A House At Auction at the Courthouse Steps
There are many physical locations as well as websites for property auctions. You can continue to go back to these places because the auctions are ongoing.
The Courthouse steps are the number one location for the majority of the auctions. The reason why the auction is at the courthouse steps is because it is the local government that is putting on the auction. The homes for sale in these auctions are therefore many different reasons.
One of the easiest ways to find out more about the courthouse auction is to call up the local County Courthouse and inquire about the property auctions that they conduct.
Everything about the auction and the properties in the auction is public information so they will freely give it to you. You may have to go through their steps and procedures to get the information but it is free nonetheless.
Usually the courthouse auction is at roughly the same time every day or certain days throughout the week. The auctioneer will show up around 9:30 AM with a list of all the properties for auction that day. Then the auctioneer will go through each one an open the round of bidding to the public.
If you plan on getting at an auction, there are a few steps that you would need to go through. Qualifying for the ability to bid is the main thing you must do in order to start placing bids.
Online Auctions
Online auctions function very similarly to an in person auction. Basically there is a property listed for auction, the bidding is open, bidders place their bids, and the highest bidder wins when the auction closes.
There are many websites dedicated to online auctions of properties. I personally would not say one would be better than the other. It really just depends on the property that you are buying.
Here is a list of a few of the online auction websites that you can place bids on properties.
- Foreclosure.com (My personal favorite)
- RealtyTrac.com
- RealtyBid.com
- Auction.com
- Hubzu.com
- Bid4Asset.com
How to Buy A House At Auction
The process of buying a house at auction is just like any other auction. The auctioneer brings up the item for auction, opens up the bidding process, and the bidding commences. The only small difference is after the auction is over, the buyer would have a minimum of 24 hours to get the financing in order to complete the purchase.
Not many people have $350,000 in cashiers checks to pay for the property then there. Usually you have to put down a deposit to hold the property while you’re getting your financing in order.
Let’s go over all the steps one by one when you buy a house at auction.
1. Register for the Auction
When you are placing a bid at the auction, you need to let the auctioneer know that you are willing to bid on the property. Whether that is an in person auction or an online auction, you must register to be able to bid on a property.
PRO TIP: Fake Bidding
A little tip is that some investors will register for a particular property to show that they are interested in, but not even bid on the property. What this will do is make other investors think that they are going to bid on the property and knock them out of the bidding process for the next property that they want.
They do this by making it look like they’re going to put in an offer and the other person puts in the first offer, then they don’t put in an offer and the other person wins the bid for the property.
Now that investor has used up all of their money on a property that the first bidder didn’t even want.
When you are registering, you need to qualify yourself as a legitimate that are. Usually that is by showing the auctioneer that you have the funds ready to pay the deposit for the property.
PRO TIP: Use Cashiers Checks, Not Cash
If you’re planning on winning a bid for $100,000, you would most likely need at least $5000-$10,000 to secure the deposit on the property.
Bringing $10,000 in cash to the courthouse may not be the best idea. Instead you want to get cashiers checks for different amounts so that you can pay the deposit while not overpaying.
-
- Cashiers checks made out in different dollar amounts.
- (1) $25,000
- (2) $10,000
- (4) $5,000
- (10) $1,000
- Total $75,000
- Cashiers checks made out in different dollar amounts.
If you are bidding at and f it is an online auction you have to go through the registration process as well. Some sites require you to show proof of funds and others do not.
When going through the registration process, they will indicate to you what is required to register for the bidding.
2. Get the List of Properties and Dates for the Auction
An auction is open to the public and they want as many people there bidding as possible. The auctioneers do their best to get as much information out as possible to everyone who would want to bid.
Both at the courthouse auction and the online auctions, you will be able to find a list of properties and the dates that the auction will be held for each of the properties.
Again, to get the list of properties at the auction, the best thing to do is to call the courthouse to see when and what will be in the upcoming auctions. They are public information and are free to you. You may even be able to find the information online if you search for the local County Courthouse auctions.
Know the Characteristics of the Property
Class of Property
Every property can be classified by the class of property it is.
Depending on the area, size, condition, etc., you could have an A, B, C, or D, class property.
Just like a grade on a report card, an A is good and a D is fairly bad. Find out more about the classes of properties with this guide to Property Classes.
Size
The size of the property matters when compared to comparable sales of similar properties. Also when you are trying to figure out how much you can rent the property for.
If you are planning on renting out the property, you need to know what other properties are being rented for in the area of the same size. Number of bathrooms, bedrooms, square footage, and the size of the garage.
When it comes to rental properties, the best ones to buy or three bedroom, two bathroom, 1200 sqft to 1400 sqft with a two-car garage. This is your general cookie-cutter home that most people will either want to rent or buy.
Make sure you know what type of property you are bidding on before you start bidding.
Condition
The condition of the properties very important to know when you are analyzing the property. You want to know how much it will cost to fix up the property in order to get it rented before you start bidding on the property.
Last thing that you want is to buy a property that needs so much work that you lose money on the deal.
Property Type
There are three main property types that you will encounter in real estate. Single-family homes, multifamily homes, commercial real estate.
Depending on what is being sold at the auction, your approaches to each one would be different.
When you buy a single-family home, you’re looking to rent or flip the property to one person. When you’re buying a multi-family home, you are more likely going to buy as an investment of onto as a long-term rental property.
Location
The location of the property must be considered when you are buying a house at auction. You want to make sure that the house is in a good area that your goal of renting out the property can be accomplished well.
You don’t want to buy a home that you cannot rent because the area has too much crime for people to want to live in. Even if you get in a property that is in a high crime area, there are ways to rent these properties and make good money.
3. Know Your Investing Objective, Price, Timeline, and Funding Options
Investing Objectives
We need to start with our goals with each property you’re looking to buy.
If you’re looking for long-term passive income than renting out a property would be the right way to go. If you’re looking for quick money then wholesaling the property to an investor could be your right move. But if you want to flip the property to make a large profit, then that is another strategy on itself.
You need to know your objective for the property. Do you plan on flipping the property, renting it out, wholesaling it, or even live in the property? Once you have your objectives and goals for the property then you know how to proceed.
Price
Set the price for the property after you have done your due diligence on the property and know what your objectives are. There is no use in buying a property that is worth $200,000 if you are going to spend $250,000 to fix it up.
As best as you can, figure out how much it will cost to fix up and deduct it from your top dollar. If you’re looking to rent the property, you need to make sure that you will be making $250 or more each month from the rents minus the expenses.
If you get a mortgage on the property you need to make sure that you know how much you are willing to spend to acquire the property with a mortgage. Then you will deduct the mortgage payment from your rental income to see how much money you will make every single month.
PRO TIP: Know Your Price
When you are buying a house at auction, you need to know what your final dollar is. Basically, you need to make sure that you have the top dollar that you would spend for that particular property and not go about it.
It is pretty exciting to take part in buying a house at auction and your adrenaline can get pumping. It is very easy to get caught up in the moment and over bid for the particular property. In doing this you throw out all the work you did before hand knowing how much you should pay for the property.
You can also potentially way overpay for property because you got excited and wanted to win the bidding on the property. Know what your top dollar is and be adamant that you not go over it.
Not even one dollar over your top. As soon as you go one dollar over it then the floodgates open and you run the risk of going even higher.
Timeline
Your timeline all depends on your goals for turning the property into a rental property, or flipping the property.
Obviously anytime to buy a property you want to get it fixed up any the rented or flipped as soon as possible. Knowing how you are able to turn over the property quickly is important.
Make sure that you have your contractors, handyman, electricians, etc. ready to move on the property when you buy it.
You also know how soon you will be able to get your money back out of the property.
Funding Options
Many people believe that you must pay all cash when you buy a property at auction. This is not true. You do need to pay your deposit at the auction when you win the round of bidding.
After you win the bid, you have 30 to 45 days to secure funding for the property that you just won.
This can be with hard money, conventional financing, buying from your aunts and uncles, or any other way to pay off the balance of the winning bid from your deposit.
Talk to your mortgage broker to see how the process of getting funding ready for property after you buy it at auction. He will let you know the process and timeline so you make sure that you get the property and not lose your deposit.
Do Your Research and Due Diligence on Each Property You Are Interested In
As you are going through the list of properties that will be in the auction, you will find some that really seem to be very good properties. These are the ones you want to focus all your energy on.
You want to make sure that you know as much as you can about the properties as possible. Everything from how much it would cost to fix up, to the area, to anything else that could be potentially negative about the property.
Here is a list of things that you can do even though you cannot actually enter into the property:
- Drive by the property
- Look in all the windows
- Peak in the backyard
- Talk to the neighbors
- Do a title search – Check for liens
All of these things will give you an indication of how the previous occupants were and if they took care the property or not. You may have a neighbor tell you that the previous occupants got it out the house and there is nothing left.
Or you may find that the place was completely remodeled on the inside in and the occupants left the place in great condition. Obviously your taking a stranger’s word for it but it does give you some information that many of people would not have.
Bid and Win A House At An Auction
When you are bidding on a property at an auction, be ready for adrenaline the pump through your veins. That is because it becomes a competition between you and the other bidders. Remember to keep your cool and never go about your top dollar.
Good investors will not go above their top dollar well that investors will break the bank and go above and beyond their top amount they want to spend on the property. Because you ran the numbers and you know how much you should spend, you need to stay at your maximum dollar figure.
When the bidding starts, there are a few ways to place your bids. You can be very aggressive and go after the property or you can sit back and jump in towards the end. There are many other ways to bid but you need to take into account your competition that are bidding on the property as well.
If you come out aggressive, other people may see that as a sign that you will not let the property go and they my back off. Or they could take it as a sign of aggression and try to take the property from you. It really varies from auction to auction.
Win the Auction
Once you win the auction, it is time to pay the deposit is required. As I said earlier, every auction has different requirements but that is for you to figure out before you start your bidding process.
If you know your top dollar that you are willing to spend on the property, and know the total deposit that is required, you are able to know how much money you should bring forth the deposit.
After you win, once the auction is over you will pay the deposit to the auctioneer.
Once you have that in order, it is time for you to get your financing so you can legally acquire the property.
After this, if you’re renting out the property it is time for your property manager to get into the property and fix it up so he can be rented out.
If you are managing it yourself, you will need to have an online software that will help you manage the properties.
6. Potential Issues to Watch Out For When Buying A House At Auction
Issues with the Title of Ownership on the Property
Even though you are buying a property from a bank through an auction, there still may be prior issues with the ownership and title with the property. This can be anything from a brother that was co-owner on the house, and ex-wife, or anything that happens to be on the title of ownership.
This is an issue that you are going to have to fix in order to sell the house in the future. A problem with the title of ownership makes a huge problem for us as investors. If someone can come in and claim the property as theirs, any money we put into the property would most likely be gone.
Then you have to go to court to try to settle the issues. That is something nobody wants to do. Make sure that you have a clear chain of title before you buy the property.
Check for Liens Against the Property
Anyone can put a lien against the property and cause issues for you in the future. if a previous owner had a contractor fix up the home, and the previous owner did not pay them, the contract will put a lien against the property which will be forced to be paid if you are ever to sell the property again.
The seller of the property is not required to take care of the lien, the new owner will be required to take care the leading and remove it from the title of ownership.
Liens can be costly to take care of if you do not notice them before you buy the property. It is better to know what you’re getting into before you buy the property by checking on the liens against any property rather than finding out about them after the fact. Looking at these costs into your budget as you look to buy a house at auction.
Right of Redemption
In some states, the original owner has the option to redeem the property. This is called the right of redemption and is where the property owner can pay the same amount as the bid price.
Even though you may have won the auction, the original owner can go back and take the property from you by paying the same amount as if they were the winning bidder.
Usually there will be some sort of interest added to the purchase price, or the winning bid that the owner will have to pay. You may purchase the property with money out of your pocket or a loan. Then the original buyer can come to you and pay you the money for the property plus interest and take the property from you.
Running Your Business with Houses You Buy At Auction
There are many ways to acquire properties for your rental property business. Properties bought at auction are just one of many tools that an investor must have been a tool belt.
Even if you just went to an auction without bidding, you will learn a lot about the auction process. Don’t be afraid to talk to the auctioneer about the process inquiring of how you can get involved.
Also, talk with the other investors that are there. Some may be not talkative and not tell you anything about the business. Others may be very open and help you get started.
No matter what you do make sure that you are protecting yourself and buying the properties at the right price at the auction.
Big thanks to Greg Gaudet for being on the podcast sharing his experience buying his first house at an auction: http://mauihomebuyers.com/
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