Do your homework before buying a home at auction

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Ask a Lender
June 22, 2017 | Updated September 15, 2017


Key Points

What to know about buying a home at auction

  • A home may wind up at an auction due to an unpaid mortgage or unpaid taxes.
  • Know your state’s tax laws.
  • Some auctions don't include a guaranteed sale.
  • Some auctions require upfront cash for the full purchase price.
  • It may not be possible to inspect the home before bidding.

If you want to invest in real estate or save money on a new owner-occupied home, auctions are an option. Buying a home through a live or online auction, however, involves wading through some complex details. And you should be aware of the pitfalls – before, during and after the process.

The auction process

There are two main reasons why a home ends up at an auction: foreclosures and tax liens.

Foreclosures happens after homeowners default on their mortgage. Generally, that happens when loan payments are 120 days behind schedule. After that, the foreclosure process can take anywhere from a few months to a few years, depending on the state where the property is located. Some states have nonjudicial foreclosure laws, where the lender does not have to sue to seize the property. Other states have judicial foreclosure laws, meaning courts are involved, and the process typically takes much longer.

A home may also end up at auction due to tax liens caused by unpaid property taxes, or unpaid state or local income taxes. In these cases, the taxing authority has seized the property.

Tax-lien auctions work differently than foreclosure auctions. In tax-lien states, the purchaser does not immediately assume possession of the property. The home owner is given time, known as a redemption period, to pay their overdues taxes, plus interest, to the lien purchaser. Interest rates vary widely by state, according to the National Tax Lien Association.

Other states, however, have tax-deed laws. This means the taxing authority sells the property at auction and the buyer retains full ownership, often at a greatly reduced rate because the taxing authority is only looking to recoup the unpaid taxes, interest and fees.

Other states are known as “hybrids” because they do not have tax-lien or tax-deed laws. In these states, investors may purchase a tax deed, but the property owner may be able to retain ownership by paying what’s owed during the redemption period.

Auction types

Once the home reaches the auction stage, there are a few ways it may be sold:

Absolute auction

A property is sold to the highest bidder, regardless of the price offered. These types of auctions typically draw the most bidders because the seller must accept the winning bid. They also carry risk for the seller because a poorly attended auction could result in a grossly below-market sale price.

Minimum-bid auction

A minimum price is announced prior to the auction and bids must meet or exceed this amount. The home then goes to the highest bidder. These types of auctions are somewhat rare as they typically occur only when a home has gone unsold on the market due to being overpriced.

Reserve auction

There is no preannounced minimum asking price and the seller is not obligated to accept the highest bid. These are the most common types of auctions as they favor the seller. Buyers may not wish to invest the time as there’s no guarantee the highest bid will be accepted.

Loan financing

Purchasing a foreclosure home through an auction is not as straightforward as obtaining a traditional mortgage loan. Depending upon the state, you may be required to pay in full at the auction. This removes the option of lender financing.

In some areas, however, auctions accept bidders who are prequalified for a loan. Lenders will look at your income, assets, debts and credit rating — just as they would with any loan candidate — and then provide a letter stating how much money you can borrow. Bring the letter to the auction along with cash or a cashier’s check. Even if the auction allows financing, they may still require a downpayment or charge a fee in order to bid.

To obtain prequalified financing, a lender may require you to do some research on the property you wish to purchase. This may include an appraisal, inspection or earnest money.

Pros and cons

Before getting involved in an auction, you should do some homework. Find a home you like, then start looking at comparable sales in the area. Find out how much is owed on the existing mortgage and if there are any other liens on the home. If the asking price is far below market value, that may be a red flag.

The main positive of purchasing an auction property is the chance of getting a good deal. Due to the perceived and actual risks of auctions, relatively few people may be interested, and this could result in a considerably lower sales price.

The negatives? Some auctions allow you to view the home inside and out before bidding. Others won’t, which means you’ll be unaware of any deficiencies until you’re stuck with ownership. If the mortgage or taxes weren’t being paid, chances are the previous owner wasn’t spending money on maintenance either.

The worst-case scenario may involve evicting a squatter or even the former owner. That can mean a significant amount of wasted time as well as expensive attorney fees.

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