How to Buy a House at Auction?

Buying a house at auction is becoming an increasingly popular option, with the auction house market size valued at USD 80 million in 2023 and projected to skyrocket to USD 93.7 billion by 2030. This method of purchasing can offer unique opportunities to snag properties at competitive prices, but it also comes with its own set of challenges.

In this guide, we’ll walk you through everything you need to know about buying a house at auction, from understanding the process to making a successful bid.

What’s the Difference Between a Private Sale and an Auction?

A private sale involves a direct negotiation between a buyer and seller, where they agree on a price and terms privately. An auction is a public event where items are sold to the highest bidder. In a private sale, the price is set by the seller, while in an auction, the price is determined by the bidders.

Why Are Houses Put to Auction?

Now you might be wondering why houses are put up for auction. There are three basic reasons behind this:

• Foreclosure
• Property Tax Default
• Quick Sale

The most common reason that a house is put to an auction is that the homeowner struggled to make the mortgage payments and left no choice for the lender but to foreclose the property. After that, the foreclosed property is put to an auction.

Another common reason is when a homeowner fails to pay the property taxes. When this happens, the local government office or the county clerk takes control of the property and puts it for sale at the auction.

Sometimes the homeowner wants to sell the property quickly and put the house for sale at an auction. This happens in a highly competitive market where the buyers’ intention is to purchase the property and sell it later at a higher price.

Types of Auctions

There are three types of auctions in real estate:

1. Absolute Auction

In an absolute auction, regardless of the price set by the sellers, the property is sold to the highest bidder. That’s why there is no reserve price in the absolute auction. Buyers’ excitement levels peak in this type of auction because the sale is guaranteed.

2. Minimum Bid Auction

In this type of auction, a minimum price is set by the auctioneer and the minimum bid accepted must be equal to that price. The minimum price is advertised through brochures before the auction. The risk level is minimal for the seller in this auction.

3. Reserve Auction

Bids are treated as an offer in a reserve auction bid and it is totally up to the seller to either accept or reject the offer. Unlike minimum bid auctions, the minimum bid is not published. The seller has a minimum price in mind and if the offer is lower than the minimum price, the bid is rejected.

Types of Bids

1- Open Bid

As the name suggests, in an open bid the bidders can see each other bid and decide whether to make a new bid or not to top the highest bid.

2- Blind Bid

With blind bids, the bidders can’t see other bids and try to make their best bid hoping that their bid would outclass the other bids.

How Does a House Auction Work?

Pre-Auction:

• Property is listed for auction
• Interested buyers inspect the property
• Buyers arrange financing and complete due diligence

Auction Day:

• Bidders register and may need to provide a deposit
• Auctioneer describes the property and terms of sale
• Opening bid is announced

Bidding Process:

• Buyers place bids, usually by raising a paddle or hand
• Auctioneer acknowledges each bid and encourages higher offers
• Bidding continues until no further bids are made

Winning Bid:

• Highest bidder wins if the reserve price is met
• If reserve isn’t met, the seller may negotiate with highest bidder

Post-Auction:

• Winning bidder signs the contract and pays the deposit immediately
• Settlement occurs within the specified timeframe (often 30-90 days)

How to Buy a House at Auction?

1. Research and Inspect Properties

The first and foremost thing before buying a house at auction is to find properties that best suit your needs. And for this, you need to look for auctions that allow pre-inspection of the properties. This way you will be able to assess the actual condition of the property and assess how much repair work is required.

There are both online auctions and physical auctions which may allow pre-inspection of the property. You can navigate to sites like Auction.com, RealtyTrac.com, Hubzu, and RealtyBid to find details about home auctions.

It’s advisable to bring in an experienced real estate agent or contractor while inspecting the property. They can better assess the home and estimate the cost of any repairs.

Another benefit of pre-inspection is that you will be able to see whether a squatter occupies the property as removing them may cost you more and that can ultimately influence your final bid for the property.

2. Get Help From Your Solicitor

Auction houses provide all bidders with a copy of the legal pack. The pack has all the legal information about the property like searches, and title deeds. Ask your solicitor to read the paperwork thoroughly to ensure the property has no legal issues.

3. Get Your Cash Ready

In most cases, you cannot finance the purchase with a mortgage. Therefore, bid with the required cash in your hand.  If you win at the auction, you need to sign the contract and pay the full amount or portion of it (10% of the total amount) immediately or within 24 hours. If you pull out after winning the bid, that could result in huge after-costs.

4. Attend the Auction

Attending the auction is the most important part of buying a house at auction. On the day of the auction, arrive early to register and receive your bidding paddle or number.

The auctioneer will typically begin by introducing the property and outlining the terms of sale. Pay close attention to these details, as they may include important information about deposit requirements, settlement periods, and any special conditions.

As the bidding begins, stay calm and stick to your predetermined budget. Signal your bids to the auctioneer, usually by raising your paddle or hand. If the bidding exceeds your limit, resist the temptation to go over budget in the heat of the moment.

5. If Successful, Sign the Contract and Pay the Deposit

If you’re a successful bidder at a house auction, the process moves quickly into the contract signing and deposit payment stage. Immediately after the auctioneer’s hammer falls, you’ll be ushered to a separate area to complete the necessary paperwork. You’ll be presented with a contract of sale, which you must sign on the spot.

You’ll also need to pay the deposit at this time, which is typically 10% of the purchase price, though this can vary. Ensure you have the means to pay this deposit immediately, whether through a bank check or other means.

Remember, there’s usually no cooling-off period with auction purchases, so your decision is final. After signing and paying the deposit, you’ll receive a copy of the signed contract. From this point, you’ll need to proceed with finalizing your financing and preparing for settlement, which often occurs within 30 to 90 days, depending on the terms set out in the contract.

Frequently Asked Questions

How to Buy a House at Auction Without Cash?

It is possible to buy a house at an auction without cash if you do proper planning and follow several essential steps.

The first thing to do is to make sure that you get a mortgage pre-approval earlier before the auction date. This means working with the lender to assess your financial situation and coming down with an answer on how much you can borrow.

After that, ensure that you are familiar with the auction terms and that they accept financed purchases. Consider a bridge loan or other short-term financing options to cover the deposit which is typically 5-10%.

Before the auction, have a thorough due diligence on the property like inspections if possible, to ensure its compliance with the lender’s requirements. Ensure you stick to your predetermined budget based on your loan approval on the day of the auction.

In case you are the winner, be ready to act fast to finalize your mortgage because auction sales normally finish much faster than traditional ones. Finally, consider collaborating with a real estate agent who is an auction expert to help you with the process and maybe even act on your behalf at the auction.

How to Buying a House at Auction First-Time Buyer?

Research Thoroughly:

• Understand the auction process
• Study local property market

Get Finances in Order:

• Secure mortgage pre-approval
• Have deposit funds ready (typically 5-10% of purchase price)

Find Suitable Auctions:

• Use online resources and local real estate agents
• Attend auctions as an observer to learn

Do Due Diligence:

• Review property details and legal documents
• Arrange property inspections if possible

Set a Budget:

• Determine your maximum bid
• Factor in additional costs (fees, repairs, etc.)

Practice Bidding:

• Attend other auctions to get comfortable with the process

Prepare for Auction Day:

• Arrive early to register
• Bring necessary ID and deposit funds

Bid Wisely:

• Stick to your budget
• Stay calm and focused

Be Ready to Act Fast:

• If successful, sign the contract and pay the deposit immediately

Seek Professional Help:

• Consider working with a buyer’s agent experienced in auctions

Are Auction Homes Cash Only?

Auction homes are not necessarily cash only, although cash purchases are common and often preferred. Many auctions do accept financed purchases, provided the buyer has secured pre-approval and can meet the auction’s timelines for payment and closing.

Can You Buy an Auction Home With a Loan?

Yes, you can buy an auction home with a loan. But as we already discussed above, auctions require immediate payment of a deposit and quick closing. Therefore you’ll need to secure pre-approval for a mortgage before the auction.

Should You Buy a House at Auction?

Whether you should buy a house at auction or not depends on your financial circumstances. If you can tolerate financial risk, an auction purchase might work for you. However, if you are a first-time buyer and don’t have an auction process, staying away from the bidding war is a wise idea. Instead, familiarize yourself with the whole auction process first and then go into the auction sale.

How to Buy a Foreclosed Home at Auction?

As mentioned earlier, foreclosure is one of the main reasons the lender puts the house for sale at the auction. To buy a foreclosed home follow the steps mentioned above.