What You Need to Know about Buying a Home at Auction
By Karina Gafford
After one too many episodes of Flip or Flop watching Christina admonish Tarek for spending over their budget on an investment property yet again, I briefly wondered if I could purchase my next home that way, too. Could I buy a house at auction sight unseen, renovate it, and earn boatloads of sweat equity in a resale by our next PCS? If you’ve watched the show, then don’t tell me the thought hasn’t ever crossed your mind!
With a rambunctious toddler, a business to run, and a cross-country PCS to boot, I decided to leave the risky ventures to the intrepid HGTV couple this time around, but I’ve done my research so that I’m prepared for the next time a PCS-inspired house hunting expedition presents itself. And, after what I’ve learned, I may even choose to sell my home at auction to keep with my next PCS timeline! Who knew that the recession would help create changes in the home selling market that would benefit the crazy moving timelines of military families?
Given the growing popularity of home sale auctions, now is the time to learn about the process so that you’re prepared should you choose to embark on an auction adventure in the future. So, for those of you curious about the auction bidding wars, here’s what you need to know about the process.
How Does the Auction Work?
According to the National Association of Realtors, there are three types of auctions. This is important to know, whether you’re listing your property or buying one.
The three types of auctions:
- Absolute Auction: There is no minimum set price and a sale is guaranteed (provided there is a single bid, of course).
- Minimum Bid Auction: As you can see, auctions for homes function pretty similarly to how auctions for any other material good on eBay would function; in this case, a buyer can choose to set a minimum bid, and the home won’t sell unless that minimum is reached.
- Reserve Auction: This method of auction presents the most security for the seller, as the seller sets a minimum bid, but also reserves the option to choose to not sell if the maximum bid is not acceptable.
Why Homes End Up at Auction
One common myth about homes for sale at auctions are that they are all foreclosures. That’s just not true.
Some homes wind up at auction because the homeowner desires a quick sale. In the event of a divorce or death, it may prove more in your interest to sell quickly at auction--even if it means not quite reaching the price point you desire--so that you can either make it easier to split your estate with an ex-spouse or divest yourself of a costly liability. While maintaining a paid off family home after mom or dad passes may hold sentimental value for you, it comes at a price. The property will still bear a tax burden, utilities, maintenance, and general upkeep. Most military families can’t afford an additional burden like this each month.
Unfortunately, not all homes wind up at auction because of a desire for a quick sale.
Some homes end up on the auction block after a few months in foreclosure. Following the recent recession, many military families found themselves in a challenging situation with their homes--they could neither continue to live in their home as a result of a PCS nor could they sell their home for an amount that would cover the mortgage owing on the property as a result of declining property values. Consequently, a large number of military families ended up struggling financially by carrying a mortgage payment from their previous duty station, and in many cases those homes wound up in a financial bind.
Other homes wind up there because the government claimed the property as a result of an unpaid tax liability. Yes, the government can claim your home if you don’t pay your tax bill. That doesn’t happen regularly, though, as there’s actually a market for unpaid tax bills where investors pay your debt hoping to cash in on the repayment with interest (or the property itself) at a later date. That’s a topic for another day, though.
Why Military Families May Want to List their Homes for Sale at Auction
CBS Money Watch reported that the recent recession has helped to change the real estate home selling landscape. In their report, they explained that not only are more buyers seeking homes at auctions, but also more sellers are taking the opportunity to sell at auction because it presents them with several distinct advantages over a traditional home sale.
They explain that the advantages of selling your home at auction include:
- Increased competition of offers on your home—ideally, you want emotions rising and a hot bidding war on your property! Hey, if it can happen on TV….
- Increased control of the showings—your home isn’t open for showing for months on end
- Increased control of the sale date—you know exactly when your home will sell.
Though bidding wars and the opportunity to avoid maintaining a neutral, pet-free, home tour friendly house for months on end may sound appealing, the latter advantage—knowing your exact sale date—presents an appealing option for military families.
If Uncle Sam says that you must move by November 1st, then wouldn’t it be nice to know that you would sell your home on October 31st? You wouldn’t have to carry two mortgages until it sells; you wouldn’t even have to maintain the lawn or utilities. You would just sell it and be done with it.
Why Buying a Home at Auction Will Not Work Out for Most Military Families
Though selling your home at auction may present a good option for a military family, buying a home may not. We’ve discussed previously how most military families enter the housing market with their VA Home Loan, a financing option that offers many advantages, including low interest rates, lower credit score requirements, and either a minimal or zero down payment. Unfortunately, if you’re looking for a zero down payment VA Home Loan or a low down payment FHA loan, then an auction is not an ideal option for you, or at least not yet.
In our post on 4 Ways the VA Loan is Reforming you can read a little more about how the VA is working to help expedite their processes and make it easier for military families to compete in tough bidding markets. But as of right now, though the property you bid on may meet the VA’s stringent appraisal requirements, it likely won’t pass their inspection.
In an auction home buying situation, cash is king. If you listen to Tarek and Christina, they often fret about hard money loans, loans at 12 % or greater with daily interest accruing. A loan accruing interest at such rates works well for this couple who are purchasing a home as a business venture, but for most of us who don’t have a proven history of dozens of flipped homes under our belts to help acquire a willing cash lender, we’ll need other options.
Some options for getting the cash to buy a home at auction:
- Retirement money
- Unexpected windfall of money, such as an inheritance or the lottery
- Equity from another investment, such as another property you already own
- A mortgage: if the auction permits a mortgage, you may have to close within 30 days. You’ll likely need a pre-qualification letter to participate in bidding if you’re financing the purchase, and you will likely need a cash down payment of up to 10% of the price of the house that you will need with you on the day of the auction. Most auctions require a cashier’s check.
4 Legal Concerns to Consider When Buying or Selling a Home at Auction
Real estate is fraught with potential legal issues. Here are four major legal concerns to consider when either buying or selling a home at auction:
- The owner of the home you purchased has deceased. The mortgage payments stopped, and the home ultimately ended up on auction at the county courthouse. You may have to contend with estate ownership rights from family members.
- If you purchase a home that has tenants or even the owners still living in it, then you may have to contend with squatter’s rights or a lengthy eviction battle.
- The property has liens against it for a second mortgage, unpaid HOA assessments, or unpaid tax assessments. A lawyer can help you determine which, if any, of these liens and assessments are valid; your title company should help with this, too.
- The homeowner may have the right to reclaim the property. Ouch! Some states, such as Georgia, permit a right of redemption period, which means that the homeowner can reclaim the property if he repays anything you paid on the property at auction with interest. Other states, such as California, do not have a redemption period. The redemption period varies, but is generally up to one year following the auction.
Knowing that you have the law on your side will help you rest easier throughout this potentially risky investment; it’s always good to make sure that you aren’t paying for a property that you can’t even take possession of! If you’re planning on buying a property, have a real estate attorney run a title search in advance of the auction.
The Biggest Drawback to Buying a Home at Auction
Assuming you made it through the financing and legal hurdles, two of the biggest reasons that keep most prospective investors out of the auction game, another major drawback still exists: Most homes bought at auction have problems.
A property that went to auction as a result of foreclosure or death has a high potential for maintenance negligence problems resulting from a lack of money, a lack of care, or both.
A property that went to foreclosure has a high potential for having intentional damage inflicted on it by the homeowner. Of the twenty or so foreclosed homes that I’ve toured, over half of them had visible electrical damage (read: wires cut!), graffiti, and damaged walls (and by damaged, I mean that someone had thrown hard objects through the wall itself). At the very least, the foreclosed homes were missing not only all of the appliances, but also cupboards, sinks, and anything else that could either be sold or repurposed.
Where to Find More Information
If the cash investment, inspection concerns, and legal issues haven’t yet scared you off, then great! Here’s where you can go to find out more about house auctions in your local market.
- Research!Check with your local courthouse and read the newspaper to find information about homes available through auction. You can also find some home auctions available online.
- A real estate agent. You may want to inquire about the agent’s experience in working with auction sales. While previously auctions represented only a niche market dominated by few agents, this area of real estate continues to grow and so too does the number of agents with expertise in it.
- A real estate attorney. If you go the DIY auction buying or selling route, then you may want to invest some time in finding a good real estate attorney who can help you navigate potentially tenuous legal grounds
info.militarybyowner.com/Five-Questions-for-the-First-Time-Homebuyer