Buying a house at auction presents many opportunities and risks. For example, auctions usually don’t allow buyers to inspect a property before placing a bid. Only people who are intimately familiar with the ins and outs of purchasing a home should try their luck at an auction.
How Properties End Up at Auction
Houses end up in an auction in one of two ways. First, when a homeowner falls behind on his or her mortgage, the bank may initiate foreclosure proceedings. When a house falls into foreclosure, the bank files a Notice of Default with the county recorder. The homeowner must either (1) catch up on payments or (2) renegotiate a new mortgage. If the homeowner cannot complete either task, the bank can put the house up for auction and kick the homeowner out.
Second, if the homeowner doesn’t pay property taxes, the tax authority can seize the property. The authority levies a tax lien, which, if not paid back, can result in the tax authority seizing the house and placing it for auction to repay the tax debt.
Pros and Cons of Purchasing at Auction
Purchasing a house at auction can result in a great deal – there are plenty of stories of people buying a dream house for thousands below market price. Also, buyers usually don’t have to compete with as many people at an auction. However, the people who do come to auctions are usually investors experienced at acquiring houses through auctions. Moreover, buyers aren’t allowed to inspect properties before bidding on them. Buyers are sometimes allowed to walk through the properties before purchasing them, but they cannot conduct an independent inspection. Therefore, buyers have to know the neighborhoods, read between the lines regarding the property’s history, and assess the value of the home-based on pictures alone. The process is high risk and high reward.
Participating in Auctions
Before participating in an auction, the buyer must submit a 5 to 10% deposit of the expected purchase price. Homebuyers should also arrive at least an hour early to register and get a bidding card. After that, he or she can participate in the auction. The starting price of an auction is usually the balance owed on the mortgage, but it can be lower to spark bidding. Finally, purchases usually need to be completed with cash or some other payment method to satisfy the full bidding price.