How Do Home Auctions Work?

The housing market is buzzing right now, and that includes home auctions. Account and sites dedicated solely to helping people find home auctions online are popping up, making it possible for people to bid on a home in another region without ever having to visit that place.

In fact, we know of more than one couple who bid on a fixer-upper in a state they'd never set foot in before, just in the last few months alone. So, what is a home auction exactly? And how do home auctions work?

What Is a Home Auction?

A home auction is the public sale of a property. This process can be facilitated by a private seller, such as a homeowner or a builder, or by a larger agency such as a bank or a government. Essentially, whoever owns the property can sell it auction-style.

Home auctions work well for people who are trying to sell a home or property fast. They are unpredictable to a degree, but in a seller's market, home auctions can bring in a bidding war that gets a home sold fast for a high price.

In a buyer's market, homes that are auctioned off generally bring in right around or a little under market value, but when the point is to sell something fast, getting market value isn't the biggest goal.

How Do You Find Home Auctions?

Home auctions can be found in many different ways. Home auctions will often be listed wherever you find local real estate listings and may even pop up on city-specific Facebook pages or on old-school print flyers.

Your local government will be able to point you in the direction of any auctions they're hosting for properties they own. A real estate agent can also help you find these listings.

If you're looking to move to a specific area, contact an agent in the region and ask about potential auction properties.

Some home auction websites list properties that will be auctioned off in many areas. These websites, like auction.com or realtytrac.com will help you find properties going up for sale well beyond your neck of the woods.

Another way people find homes for auction is through special Instagram accounts. Many of these accounts are dedicated to historic homes going up for auction. People looking for something with a little character might find these accounts helpful.

How Home Auctions Work

Now that you know how to find auctions, you've probably got questions about the logistics. When it comes to bidding on a house at auction, you may have less competition than you would bidding on a normal home. Even during times when it's a seller's market or in areas where demand for homes is high.

That being said, you'll often be bidding against investors who have lots of experience with home auctions. That's why it's important to brush up on the process. Because more likely than not, you’ll be in a bidding pool with people who have done this before.

There are two types of home auctions. The first is a lender-confirmation auction, in which the lender does not have to accept your offer even if you were the highest bidder. The second is an absolute auction in which the highest bidder takes the property.

In both auction types, the starting price is set for the home and you can't bid any lower than that starting price. Often this starting price is the amount currently owed on the property, especially if the property is in foreclosure.

The terms of the auction will be set by the sellers. Make sure you have these terms spelled out from the very beginning so you know how to attend the auction. Traditionally, these auctions were held in person, either on-site or at a neutral location like a public meeting room or a hotel ballroom.

Now, more and more of these auctions are taking place online. It's critical once you find an auction listing that you confirm the auction details. Because regardless of where the auction takes place, you need to know where and when to attend.

Before you can bid at the auction, you'll need to make a refundable deposit of five to ten percent of the expected auction price. It doesn't matter what the house ends up selling for, as long as you put down five to ten percent of the expected price.

Online, you'll wire this money. In person, you'll need to bring a check at least an hour before the event. This will help you secure your bidding paddle at an in-person home auction.

Like any other type of auction, in-person auctions tend to happen very quickly. We've all seen a movie scene where potential buyers throw paddles up in the air and outbid each other, and home auctions go this quickly.

If you're attending a home auction in person, it's likely that more than one thing is up for sale and you'll sit through a few listings before yours comes up. Be prepared, and know your limits.

If somebody outbids you, don't push yourself higher than what you're comfortable with paying for the property. Getting caught up in the moment is really easy.

Online auctions tend to be a little less hectic because a longer time period can be set. Sometimes these auctions will take place on websites over the course of a few days or week.

The terms for an online auction will be spelled out with the listing, and bidding instructions will be listed as well. Follow the instructions closely and pay attention in case you get in a bidding war with somebody. It's easy to miss being outbid online when you're not looking closely.

Title Search

When you become the owner of a house, you also become the owner of any liens against the property. You'll want to pay a title search company to check for any liens on the property before you buy it. There can be other hidden fees associated with the property that a title search company can find for you.

You don't want to bid on a home not knowing you'll have to pay off a builder's lien or something like that. Ideally, you want to buy a house with a clean title.

After you secure the bid on the home, we recommend purchasing title insurance immediately to protect yourself from any liens that didn't show up during the title search. This doesn't happen often, but it does occur enough that it's smart to get insurance.

Once you own the title of the home, it doesn't mean that the home will be immediately vacated. After your title has cleared and become certified, you may have the unfortunate task of evicting the current tenants.

This can be a long process with lots of legal challenges. Make sure you're up for the task before you even purchase a home that's in foreclosure or pre-foreclosure. Sometimes new owners simply pay tenants to vacate, but even if that works, you may still be stuck with a house full of someone else’s junk to clear out.

The Home Auction Catch

For buyers, buying a home at auction can be risky. Even though you have the potential to get a great deal, there are risks involved. More risks than buying a home the traditional way. One big risk is that purchasing a home at auction does not allow time for inspections.

Most auctions don't allow any people to view the site either. So even if you're local, you might find that there are no walk-throughs or visits allowed, even by an inspector or real estate agent. This is a big risk, because while many things will be disclosed on paper, big issues can get left out.

There's a chance you'll end up with a money pit of a home that looks good on paper, but that would have failed a standard inspection. Auction buyers often end up in over their heads because they got a great deal on a house that then required hundreds of thousands of dollars worth of work.

That being said, sometimes you get really lucky and you end up with a house that just needs a few cosmetic touch-ups. It’s just hard to know without being able to see or inspect the property.

A few general facts can help you make informed decisions when bidding on a house that doesn't allow inspections. Knowing the lifespan of utility appliances like water heaters, or structural elements like flooring and roofing, can help you estimate potential repair and upgrade costs. It's not a foolproof way of purchasing a property through auction, but it will help you plan for unwelcome surprises.

Foreclosure Properties

The interesting thing about foreclosure properties at home auctions is that the lender is not legally allowed to make a profit off the auction. So, more often than not, these homes are sold at a loss. Which is the big draw for people coming to a home auction.

The idea of getting a good house for a great price is very enticing. If at an auction, the bid goes higher and the lender would potentially make a profit, that extra money goes to the current owners of the home to help them pay off their debts.

But while you can get a really good deal on a home in foreclosure, sometimes the people losing their homes are understandably upset. In a worst-case, they might significantly damage their home to drive down its value. This isn't common, but it does happen.

Pre-Foreclosure Properties

Properties listed as potential auction sites in pre-foreclosure are tricky. These homes are listed by banks or governments because their owners are too far behind on payments.

This isn't the case of missing a mortgage payment or two by a few weeks, it happens when the payments are so far behind that the bank views owning the house as too much of a risk.

These homes are generally listed on auction sites as properties that are "coming up," but the homeowners still have time to make payments and catch up. If the owners catch up on payments in time, there's a good chance the home will be pulled down and not go to auction.

So if you see a home listed on an auction site as pre-forclosure, just know that there's a chance that it may never make it to market.

Conclusion

The pros of home auctions are their fast pace and lower prices. The cons are potential unexpected repair costs, property liens, and tenant challenges.

For many people, this risk-reward is worth investigating, we just recommend that you go in with your eyes open to avoid any tough surprises. Good luck with the process if you choose to take it on!

Once you've got your fixer-upper purchased, here are a few upgrades you can easily DIY on your own.