A Beginner's Guide to Real Estate Auctions

Summary: This article explains how a real estate auction works, and how you can use them to your advantage. We will talk about your financing strategy, pricing research, the bidding process and more.

According to the experts at RealtyTrac, we could see a record number of foreclosure filings in 2011. So there's a lot of inventory out there. A lot of these foreclosure homes are sold through a real estate auction. In many ways, the process works like any other auction. But there are certain things that make it unique. Here's what you need to know:

Understanding the Lender's Mindset

The biggest benefit of buying a home through an auction is the potential for savings. Lenders want to sell these properties as quickly as possible. They are losing money by having the "non-performing asset" on their books. This is lender-speak for a property that is not producing any mortgage payments. It's just sitting there, costing them money in the form of upkeep and marketing. So they want to offload the property ASAP. And that's where the real estate auction comes into the picture.

The lender is not in it to make a profit. That time has passed. If they happen to make a profit through the auction, they'd certainly be happy about it. But it's not their primary goal. Nor is it likely to happen. Their number-one objective is to sell the home as fast as possible. It's a money-loser for them. And this is why the bidding for auction homes generally starts below market value. They want to sell it today.

Two Types of Real Estate Auctions

A public auction for a foreclosed home will normally take place at the county courthouse in the county where the property is located. But they're not always conducted by government officials. They can also be conducted by private companies, such as the Williams and Williams auction company (www.williamsauction.com). 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.

How a real estate auction works will largely depend on the type of auction it is. There are basically two types. The difference has to do with where it's held, and who is managing it:

• Sheriff's auction -- This is when the properties are auctioned off by a government employee in the county where the property is located. Sometimes the county sheriff manages the auction, hence the title. Other times, the auction will be managed by some other county official. These real estate auctions are usually held on the courthouse steps or inside the lobby area. You can find out about these sales in your local newspaper. Look for the "public notices" section for upcoming events.
• Private company -- This is when the properties are auctioned off by a private company. There are several nationwide companies that manage real estate auctions. Some of the big names include Hudson and Marshall (www.hudsonandmarshall.com) and Williams and Williams (www.williamsauction.com). Some companies focus on certain regions of the country. Try doing a Google search for "real estate auctions" followed by your city and state. You should find a private company that serves your area.

For the most part, the real estate auction process works the same, regardless of where it's held. Though you might get more information about the properties for sale when using one of the private companies. These companies usually have photos and additional details on their websites, and they generally encourage walk-through inspections prior to attending the auction. 

How the Process Works

How does the real estate auction work? This will depend on the type of auction you are attending. Overall, the process is similar. But there are certain differences:

Sheriff / County Auctions

These events are normally advertised in the local newspaper, as mentioned earlier. There should be a "public notice" section of the paper that lists upcoming property auctions. The notice will also tell you where the event is to take place. It's usually at the county courthouse.

In most cases, the bidding will start at a certain percentage of the appraised value (such as two-thirds of the appraisal amount). The property will likely be sold as-is, with no warrantees of any kind.

If you want to bid on a property, you need to have your financing squared away. Sheriff auctions usually require the full purchase price to be paid on the spot. If a home does not receive any bids, it will go back on the market as a bank-owned property.

Private Company Auctions

A real estate auction conducted by a private company works in much the same way. Upcoming events will be advertised on the auction company's website well in advance. This gives you an opportunity to ask questions about a particular property, or to conduct a walk-through inspection.

The auction itself may only last a few minutes. By this time, you should already know how much you're willing to pay for a certain property. You must register as a bidder so you can receive a bidder number.

Before the bidding begins, a representative from the auction company will explain the bidding process and the terms of sale. You might only have to make a down payment at the auction (as opposed to the full purchase price commonly required at a sheriff's auction). This will vary from one company to the next, so find out the rules and payment terms in advance. Read the website!

Pricing and Bidding Considerations

I'd like to emphasize the readiness factor. When you attend a real estate auction, you need to be ready to bid on (and possibly purchase) a property. It's not the time to ask a lot of questions or "kick the tires." You need to do these things before the auction begins. The other bidders will have their financing lined up and all of their questions answered. They'll be ready to move forward with the actual bidding. You'll be surprised at how fast it goes, the first time you attend an auction.

How does pricing work at a real estate auction? The price will be set in one of two ways:

• If the home has been appraised recently, the starting price will probably be a certain percentage of the appraised value (two-thirds, 75 percent, etc.).
• If the home does not have a recent appraisal, the starting price is normally based on the amount owed to the lender.

The lender might add on other expenses incurred during the foreclosure process. But the starting price will probably still be below the full market value of the home. This is what draws home buyers and investors to real estate auctions in the first place.

It's best to avoid a bidding war during a real estate auction, especially if you're new to the process. Highly competitive, back-and-forth bidding does nothing but drive the price up. This defeats the purpose of an auction, which is to buy a home for less than market value. Most bidding wars are based on a combination of inexperience and ego among the bidders.

Homes are Usually Sold As-Is

In closing, I'd like to reiterate a point we discussed earlier. It's important to understand that most homes sold through an auction are sold as-is. This means there are no warranties or guarantees, nor will you be able to make any repair requests. You either take it or leave it.

Some homeowners who are losing their homes to foreclosure harbor resentment toward their lenders. So they don't take very good care of their houses. Some will go out of their way to damage the property before leaving it. That's just the reality of buying distressed property. So if you are given a chance to inspect a home before the auction takes place, seize that opportunity! Once you buy it, it's yours to deal with -- warts and all.

This article explains how a real estate auction works. If you would like to learn more about this topic (or about the home-buying process in general), use the search tool provided at the top of this page. It gives you access to a library of more than 800 articles and tutorials. For most home buyers