The process of buying a home at an auction (called auction homes or foreclosed homes) can be exciting. It means you literally show up at the auction (or online) and place bids on a property, along with other buyers and bidders. If you win, you get the home right then and there. But guess what? You also have to pay right then and there. Buying a home at auction without cash is much harder to do, although not impossible.
The other ways you can buy a foreclosed home without cash is through hard money loans, alternative financing, private loans, or bank financing after the house is paid for at auction. Before we dive into whether a foreclosed home is right for you, make sure you understand all the pros and cons.
Understanding home auctions & foreclosures
There are many reasons that a house could be auctioned, for instance, a homeowner may be declared bankrupt, a divorce case may force the couple to quickly sell their house, the death of the homeowner, etc. All these can lead to the auction of the property in the market. However, the main reasons for home auctions are:
- Pre-foreclosed home
- Foreclosed home
- The default of property tax
- Other liens on the property
In the foreclosed home auctions, you will find houses that have been seized by banks or mortgage lenders. These houses have been seized from owners who have not managed to pay back the loans lent to them by the said organizations on time. Sometimes, a homeowner may fail to pay the mortgage loan for some time — possibly a few months — and go into default. This is most likely to lead to foreclosure of the house by the bank or mortgage lender. In such cases, the bank usually sends a default notice to the county recorder. If the homeowner fails to pay the outstanding balance or negotiate with the bank or lender, he or she risks losing the house to auction. Trustees hired by the bank are usually the ones who hold these auctions, but courthouse auctions are also possible.
The default of property taxes
Property may end up being auctioned when the owner fails to pay the outstanding property taxes. The owing tax authority, in this case, seizes the house and lists it among property to be auctioned at a courthouse auction. These auctions are usually conducted by local clerks, sheriffs, or comptroller offices. (Note this is one of the main reasons why many homeowners lump their property taxes into their monthly mortgage… so they don’t accidentally forget to pay or misbudget their expenses!)
Pros and cons of buying a foreclosed home at an auction
Let’s compare the advantages and disadvantages of buying a home at an auction vs. the more traditional route of homebuying.
Advantages of home auctions
- Save time. You show up, bid, win, and it’s yours. Congratulations! 🎉 … In reality though, it’s not quite this simple. That said, it’s still much quicker than traditional home buying
- Avoid the negotiation. The seller is the bank or government. They want to get the asset off their hands as quickly as possible, unlike traditional homes which require the buyer and seller to negotiate a number of terms and conditions of the sale.
- Free and clear title & encumbrances. In traditional home buying, there is a risk the seller does not have title free and clear. There may also still be outstanding loans on the property. But not in foreclosure sales! The buyer can usually rest assured the bank or government has cleared title and any debts on the property.
Disadvantages of home auctions
- Pay in cash. The winning bidder must buy the home with cash on the same day they win the auction. Of course, they can try to secure a mortgage after buying the home but the initial purchase must be made in cash.
- Sold “as is”. No inspections, walk-throughs, appraisals, etc. The buyer is purchasing the home under its current condition and takes all the risks associated with the home.
- Fees and commissions. If a buyer wants a broker or representation, or help, they must pay out of pocket. Unlike normal home sales, where the fees get paid out of the sale price, with auctioned houses, the bidder is left holding the bill for additional services.
Step 1: Find the auctioned homes
There are a few places a buyer can go to find auctioned homes. The easiest way to get started from the seat of your home is to check auction listings online or other websites. For example, there are government sites that have information on which houses are up for auction, especially courthouse auction. Further, Fannie Mae lists a bunch as HomePath. Lastly, HUD operates HUDHomestore.com and FDIC maintains its own too.
Since property buying is always a local endeavor, consider searching through regional newspapers and magazines. Many times there will be a foreclosed home section there for prospective bidders. These days, there will be a print edition and very likely an online edition.
Another avenue is through your own network. Real estate brokers, contractors, and appraisers are all familiar with the local market. They would be the best people to work with if you want a foreclosed home on auction. They have the information you need regarding the costs of construction and remodeling. They can also lend you a hand in estimating the property’s worth as well as the auction process. (Real estate agents may not be enthusiastic enough to help because they do not make much on live actions).
Step 2: Get familiar with the process
Moneylenders and courthouse auctions have their own processes that will require you to contact them before the actual auction date. So, if you want to acquire property in the foreclosed home auction, you must register early enough. After registration, you will be informed on the actual auction day when you can bid on the house you wish to acquire. Normally, auctions require bidders to pay for the property upfront or by the end of the auction day. For this reason, you need to be ready to pay upfront with cash or other certified funds. Once you pay, you will be given the property deed declaring you as the owner of the house.
Buying a foreclosure at auction without cash
Most house auctions are usually “Cash only auctions”, in that the bidders need to have the money at hand when bidding for the foreclosed homes. This requires a lot of money since you have to pay the money in full once you win the auction. Payments in these auctions are usually done using cash, a cashier’s cheque, or money order.
There are various ways you can buy a house at auction without cash. Though these may be rare, it is possible. Non-cash options include financing, lines of credit, and loans. Besides cash, you can pay for a house at auction through:
- Financing is the payment option in which a seller accepts installments. That means that you can make monthly payments over a certain period. This is an agreement between the two parties, a buyer and a seller. The payments are made directly between them, and there is no third party. You usually have to pay the deposit on the auction day, and you’ll have up to 30 days to pay the rest.
- Lines of credits function very similarly to credit cards. What you need to do is borrow money to make a purchase and pay the balance. After that, you can borrow more money for more purchases and so on.
Buying a house at auction with a loan
Loans can help a lot when it comes to buying a foreclosed home. Though most auctions, including courthouse auctions, require one to have cash, it is possible to use a loan as a means of payment. You can acquire one of the various kinds of loans available for borrowers who are not qualified for a mortgage or need quick funding for real estate property.
- Personal loans. These don’t require collateral. That means that the property or income isn’t at risk. Be careful though, they incur much higher interest rates than traditional loans.
- Hard money loan. If a bank denies you a personal loan, you can always take a hard money loan instead. For a hard money loan, you need to provide real property as collateral. The advantage of hard money is that you don’t need an excellent credit score. This loan, however, has higher interest rates as well as fees. You can get the cash fast, even in a couple of days. This is good for bidding on foreclosed homes. You do not have to have good credit to get this loan because the lender evaluates the property as collateral instead of your financial records. In this case, the lender checks if the foreclosed home at auction is valuable enough to protect the default payments. That said, defaulting on a hard money loan can be a disaster－the borrower can lose the asset, and their credit will be destroyed.
- Private loans. Any loan you obtain through your private connections (e.g., friends, family, etc.). Many first time home buyers opt for this type of loan since it often guarantees flexibility. That means that the consequences of not paying on time are not that dangerous. However, it’s advisable to borrow money only from the people you can trust and that trust you back!
A few more tips
Make a plan
Auctions can be thrilling for many people. That means you can easily forget how much you can afford. To avoid this, make a clear plan before the auction. Write down your maximum bid. Remind yourself all the time that you won’t bid more than that. Stick to it. If you’re not sure you can resist, ask someone else to bid in your name.
Get familiar with what you’re buying
If at all possible, find out which homes are on the auction block and familiarize yourself with them, and the surrounding areas. Try to visit the property at least once to decide whether you want it.
Buying a house at auction can have a lot of advantages if you do it properly. That means that you need to know both your rights and obligations. Make sure to inform yourself about the property before you buy it. Learn how you can pay. You may end up getting a beautiful home at a very affordable price. However, this option could be highly risky so keep in mind there are other home types that might be a better fit. Also, ensure that you are careful and well-informed about the houses on auction as well as the auction details. Finally, don’t despair if you don’t win. The right opportunity awaits you.