Real Estate Auctions - Buying a Home at Auction

by Brandon Cornett

I probably don't need to tell you about the rise in home foreclosures that has taken place in recent months. If you've seen the news or read a newspaper lately, you've heard about the record-breaking number of foreclosed homes on the market as the result of the subprime lending crisis.

But what you may not know is that many of the properties that get foreclosed upon end up being sold at real estate auctions for less than market value. What this means to you, as a home buyer, is that you can often save a lot of money by buying a home at auction (instead of buying it through a traditional real estate transaction).

So let's take a closer look at this process.

Events Leading Up to a Home Auction

Legally speaking, there are two types of foreclosures in this country -- the judicial foreclosure (also referred to as an "in-court" foreclosure), and the non-judicial foreclosure or "out-of-court" process. The majority of real estate foreclosures in this country are non-judicial / out-of-court procedures.

Regardless of what type of foreclosure is taking place, the overall process can last up to five months (and sometimes longer). If you're planning on buying a home at a real estate auction it's important to understand this timeframe. During the pre-foreclosure stage, the homeowner may try to avoid foreclosure through various means (such as a mutually agreed-upon repayment plan between lender and homeowner).

So the first step to buying a home at auction is to (A) understand the process involved and (B) have the patience needed to deal with such a lengthy process.

It's also worth noting at this point that some homes facing foreclosure never make it to the real estate auction stage. That's because the homeowner make sell the home before the bank forecloses on it, typically through what's known as a real estate short sale process.

So now we've learned two things about the process of a home going to auction. We have learned that the process can be a long one, and that the home might be sold before a real estate auction even takes place. But for hypothetical purposes, let's flash forward and say that a foreclosed home is, in fact, reaching the auction stage...

Announcement of Real Estate Auctions

When a homeowner fails to make payments on a mortgage (repeatedly), the lender will eventually file a notice of default against the homeowner. This is part of the paperwork process the lender must go through, and it is usually the first official step toward a real estate auction down the road.

After this filing, there is usually a three-month period leading up to the notification of real estate auction event. During this period, as we've mentioned, the homeowner may try to avoid foreclosure through a variety of tactics.

But for this scenario, let's say that the homeowner fails to sell the home or get caught up on mortgage payments. In that case, the home is going to be sold at an auction, which means there will be an opportunity for investors to save money by buying the home at auction (instead of buying it from a homeowner).

About two or three weeks before the real estate auction is set to take place, a notice of sale will be posted for public viewing. Often, these notices are posted at the county courthouse or wherever the auction is to take place.

In most cases, the lender will use other channels to get the word out, in addition to the public notice. It benefits the lender to have a lot of people at the home auction because it increases the likelihood of a quick sale. And that's exactly what the lender wants.

A public auction for a foreclosed home will normally take place at the county courthouse in the county where the property is located. In true auction fashion, the home will be sold to the highest bidder. Afterward, a deed will be given to the successful bidder, who now becomes the homeowner.

Home Buying Tips for Public Auctions

Can you save money when buying a home at auction instead of through a traditional real estate transaction? Sure you can. We discussed how the lender wants to sell the home quickly, because they are losing money by having the non-performing loan on their books. So they're usually not in it to make a profit on the home, but to sell it as quickly as possible.

With that being said, there are some things to keep in mind when buying real estate at auction, especially if it's your first time doing so. The three most important things to understand are:

How auction homes are usually priced
How to bid wisely on such properties
What financing requirements the auction has for bidders

Pricing and Bidding Considerations

The starting price for a home being sold at auction is normally based on the amount owed to the lender (combined with other expenses the lender might have incurred when foreclosing on the property). In fact, this is what draws investors to this method of home buying in the first place -- it's a chance to purchase a home for less than market value.

So let's move forward in the process and assume that you are now attending a real estate auction with the hopes of buying a home for a great price. You've got your eye on a particular property that was foreclosed on a few months ago. Now you want to bid on the property.

But what about financing? Do you have financing lined up for the home? In most cases, you will need to handle this beforehand because most real estate auctions require payment soon after a successful bid. In other words, you can't attend an auction, bid on a home and then go out to obtain the money. You need to have your financing lined up in advance.

This is something that a lot of first-time auction attendees overlook. But when you think about it from the lender's perspective, it only makes sense to have financial requirements for people bidding on a home. The last thing the lender wants is to put a home up for auction only to have the top bidder fall through with the financing. They would have to do the process all over again, or else contact other bidders.

The bottom line, then, is that anyone thinking of buying a home at auction needs to do some research in advance. Find out about the financing rules for bidders, how the bidding process works, where the auction will be held, and any other pertinent details. A little research goes a long way when it comes to buying foreclosed real estate at a public auction.

It's also wise to avoid a bidding war during the auction. When you think about it, this defeats the purpose of buying a home for less than market value, because a bidding war does nothing but drive the price up, up and away. Most bidding wars are based on a combination of inexperience and ego in the person bidding on the home.

You Get What You Pay For ... Nothing More

There's one last thing I'd like to explain about buying a home at auction (following a foreclosure). You must realize that most homes sold in this way are sold as-is with no warranties of any kind. It's also worth noting that homeowners facing foreclosure do not always take the best care of their homes, and some will go so far as damaging the property out of anger or spite.

So if you have the opportunity to look a home over before the auction ... take the opportunity! Otherwise, just realize that you get the home you bid on, and nothing else in the way of warranty.

I hope you've found this guide to buying a home at auction helpful, and I wish you well in your real estate adventures!