Bid or bad? The appeal and risks of buying a home at auction
Posted April 20, 2016
It’s easy to get caught up in the competitive excitement of an auction.
Bidding up the price of your spouse's baked goods for charity or snagging an antique clock at a fraction of its value is one thing. But the stakes rise considerably when it comes to landing a solid deal via a home auction.
“It’s really a case of caveat emptor — let the buyer beware,” said Michael Kelczewski, a Realtor with Brandywine Fine Properties Sotheby's International Realty. “When acquiring a property sold as is, significant due diligence is required.”
Although hundreds of thousands of homes are available through some form of auction, real estate professionals caution that availability doesn’t necessarily translate into sensible opportunity.
To reduce the inherent risks it’s critical to know the system in and out — and the pitfalls, which can be numerous.
Any property can be auctioned, although most are foreclosures. According to the website RealtyTrac, in early 2016 nearly 900,00 properties were in some stage of foreclosure. Some 40 percent of those homes were available through auctions, either in person or online.
Although procedural differences vary by state, a trustee of the property is generally assigned by the lender or a court officer. The trustee then oversees a foreclosure sale to recover the balance of the loan in default.
Data confirm that an auctioned home can be a bargain. As of early 2016, the median sales price of a foreclosed home was 42 percent less than a non-distressed home.
Whether buying a home for a quick turnaround sale or for occupancy, home auctions are growing in popularity, said Steve Udelson, president of the online home auction marketplace Hubzu.
“More traditional buyers are beginning to see the significant value that properties found at auction can offer,” he said. “Many of these are bank-owned homes, which are in good condition and move-in quality.”
Nor are home shoppers geographically confined. Online auctions allow buyers to pursue homes throughout the country or internationally.
“Online auction marketplaces can be a great option,” said Udelson. “For instance, we offer a large inventory of properties and give participants the opportunity to place bids, get real-time updates on properties and schedule appointments.”
However appealing purchasing through an auction appears, professionals urge caution throughout the entire process. First off, it’s critical to understand the nature of properties that end up on the auction block.
“Most of these properties have been … vacant for some period of time. The maintenance on the property is probably lacking,” said Jolie Williams, a Plano, Texas, Realtor. “If the previous owners were desperate, they could have possibly stripped the entire house, selling off what they could.”
Another obstacle is investigating the property. Not only do online auctions make an on-site inspections difficult, legal restrictions can preclude prospective bidders from entering and examining nearby properties, particularly if the home is occupied.
“You probably will not be able to access the property prior to the purchase. Without access to the property, you will not be able to see any damage caused by lack of maintenance or the previous owners,” said Williams. “If you can’t get in and inspect the property, the utilities are often not able to be turned on. There’s a risk that there could be issues with the electricity, gas, water or sewage.”
You could end up buying a home with a “squatter” — someone living in the home illegally.
“If a squatter’s living in the property you have purchased, it is on you as the owner to evict them,” said Jamal Asskoumi, owner of CastleSmart.com, a United Kingdom-based online estate agent.
Financing is another challenge. Asskoumi said buyers are often obligated to pay a percentage of the price on the day of purchase, if not the entire amount: “That means now you are completely liable for a house you've never even seen before,” he said.
But Udelson noted that an accepted bid can be offered on the contingency that suitable financing be arranged.
For home auction shoppers to ensure a good deal and reduce untended outcomes they should consult with a real estate attorney. “A strong understanding of construction and law will be required for any serious attempt,” said Kelczewski.
Research the estimated market value of the property via any number of Internet sites and check with a local real estate agency for sales of comparable homes in the neighborhood. Find out how much the borrower owes on the mortgage and whether there are any liens against the property you could be saddled with. A title company or attorney can run title searches on properties of interest.
If possible, do a drive-by to check for any notable exterior damage or necessary repairs.
Knowing the relevant financing requirements, whether it is full payment the day of the auction or a grace period to complete the transaction, is essential.
“If you are financing, get pre-approved. This will help you know how much you can afford,” said Udelson. “Also, set aside money for the deposit. Home auctions move fast, so it’s important to be prepared.”
Lastly, don't let the prospect of picking up a property for a fraction of its apparent value blind you to the real reasons why the deal seems so good.
“I had a Realtor friend who purchased a house at auction for what he thought was a great deal — until he gained access to discover the whole back of the house had been destroyed by a fire,” said Williams. “Even real estate professionals sometimes get burned when it comes to purchasing properties at auction.”
Jeff Wuorio lives in Southern Maine, where he covers personal finance and entrepreneurship. He may be reached at email@example.com and his website is at jeffwuorio.com.