Buying a House at Auction? 10 Things You Need to Know

(Making sure you don't pay too much)

A man yelling into a megaphone.

Buying a home at auction can mean significant savings for potential bidders. Buyers are attracted to the opportunity to pay cents on the dollar for a home compared to traditional sales. But how does one go about buying a home at auction? What do you need to know? And are you covered with a homeowners insurance policy?

1. You Haven't Missed the Boat

Many buyers may think that since the housing market is in recovery, their chance at finding a home at auction has passed. While foreclosures are down from their record highs in 2009, they are still well above historic levels.

Some areas are still quite depressed in terms of the housing market. According to real estate tracking data, states like California, Florida, Michigan and Ohio are still dealing with the housing fallout. In fact, these four states combined alone accounted for more than half of the nation's total foreclosures in March, according to RealtyTrac.

In other states, some cities and rural areas are also experiencing higher numbers of foreclosures, even as the rest of the state is in recovery. Foreclosures aren't the only reason a home may be sold at auction. Some families prefer auctions to settle the estate of a deceased family member.

"When you're looking to buy a home at auction, you need to be flexible on location," says veteran real estate agent Daryl Bronniche.

2. Do Your Research

While it's important to do your homework any time you buy a house, it's extremely vital in the case of purchasing a home at auction. Most people have never attended large estate auctions and may not know what to expect. Bronniche advises potential bidders to attend at least one auction before making any offers.

"Just be an observer. Watch the winning bidders. See what they do and you may learn a few things," he advises.

Once you're ready to attend an auction and make a bid, Bronniche said it's a good idea to have several properties in mind.

3. Find Potential Properties

There are three sources for finding auction properties: real estate agents; newspaper listings; and auctioneers themselves.

When you have a real estate agent looking for foreclosed and auction houses, this can free up considerable time for you to tend to other matters in the process.

During your search, find out the type of auction at which the property is being sold. Trustee sales often require bidders to pay the price of the home in full that day. Some may require considerable down payments with full payment required soon after the purchase.

4. Decide How to Finance Your Purchase

Most home buyers take out a mortgage to finance their purchase. You may want to apply for a pre-approved home loan to determine your buying power.

At some auctions, however, the full sale price must be paid shortly after the winning bid is made. In this case, be prepared to cut a hefty check and bring along your life savings. You can find listings for these auctions in your local newspaper under "notice of trustee sale" or "sheriff sale," and they are not for the inexperienced bidder.

It's important to determine which type of auction at which you would be comfortable (or financially able) to purchase a home.

If you plan on financing the purchase with a mortgage or home loan, chances are the lender will require you to purchase a homeowners insurance policy. In that case, it's a good idea to shop around for the best rates. 

Independent insurance agents in our network can locate several quotes from a variety of different providers, enabling you to find the best homeowners insurance policy at the lowest rate.

5. Consult the Pros

For first time auction buyers, it may be a good idea to speak with an attorney who specializes in estate sales.

"Generally, you're buying the house as-is," Megan Hruska, with an estate planning law firm, said.

"That can mean anything from becoming responsible for any back taxes owed on the property, to discovering major damage in need of repairs before the house is inhabitable," she said. This is where your next experts come into play.

6. Do a Full Title Search

Heidi Culbertson, an agent of the Fidelity National Title Group affiliate, said this type of research is vital for anyone considering a home purchase at an auction.

"A full title search tells the buyer that the seller has full rights to sell the property," Culbertson said. "It also tells the buyer about things like open mortgages, any judgements, existing utility easements, and any state or federal tax liens."

As foreclosed homes often exchange hands several times, either by investment property owners who rent it out, or the banks, it is extremely important to verify that the seller is legally allowed to auction the property. A full title can also notify potential buyers of any unpaid taxes that they will become responsible for paying if they buy the property.

A full title search can typically run anywhere from $150 to $600.

"It really depends on how much paperwork is involved and how many times the property has exchanged owners," Culbertson said.

7. Have the Home Assessed for Damage

Unfortunately, many homeowners facing foreclosure retaliate on the banks by destroying parts of the structure. It's not uncommon to find that all of the copper wiring or plumbing has been removed by the former residents of a foreclosed home.

Rehab contractor Lee Alley said he has found damage or missing copper materials in the majority of foreclosed properties he has repaired.

"You'll want to know what it will cost you to fix the damage and replace the plumbing," Alley said.

8. Time Your Bid

At larger, public auctions, it is not unusual to find several bidders making a move for the same property. If this happens to one of the homes you have your eyes on, wait until the bidding dies down a little before you make your first offer. There is no need to increase the bid prematurely by adding another contender into the mix.

9. The Early Bid Gets the Worm

Often, the first few homes sold at a large, public auction sell for far less than the last few homes bid on that day. That's because buyers often wait to see how the bidding will go throughout the day before making their move. If you are attracted to a home that is scheduled to auction early in the day, you may be able to pay even less for your property.

10. Don't Be Sucked into Bidding More than You Can Afford

Auctions are often full of excitement. It can be easy, especially for the inexperienced bidder, to become enthralled with the process and momentarily forget that they are operating on a budget. If you find yourself in a bidding war and the price is quickly approaching your limit, it can be tempting to go over your budget for the thrill of winning. It may be a good idea to bring along a friend or family member who can keep you in check as you approach your financial maximum.

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