Fran Young lives in Springfield, Mo., and has purchased seven properties at auction, including a duplex, four small homes, a 10-acre plot of land and her current home.
“The land prices are more reasonable,” says Young, who purchased one of those homes for $13,000. “Besides the great number of availability of places, you can go to open houses and really inspect the place, so you’re saving.”
Young is a proponent of real estate auctions, in which a home is sold to the highest bidder. They take place at courthouses and other locations, even online. Foreclosure auctions are held by bank-hired trustees. All types of properties (single family, multi-family, condos, commercial property, luxury property) are sold at auction.
But before you fantasize about buying a home with the slam of a gavel, consider the pros and cons of real estate auctions.
For instance, not all auctioned houses are open to viewing for the public – Young was lucky to attend an open house, but in other auctions, buyers have never seen the inside of the house for sale.
“Deferred maintenance may have caused significant damage which you need to repair,” says Elena Rivkin Franz, a real estate attorney with The Mlnarik Law Group, Inc., in San Francisco.
Buyers willing to take this gamble are rewarded with lower prices.
“The lenders [at real estate auctions] are generally selling the properties at or below the amount of their mortgage note,” Franz says. “A buyer can get a great deal. Many times, even if the home had several loans on it amounting to something beyond the current fair market value of the property, the first mortgage loan is below the existing market value.”
“Auction prices generally reflect the seller’s motivation,” says Diana Peterson, executive vice president of Chicago-based Auctions by ATG, which offers residential and commercial properties through live and on-line auctions. “Auctions eliminate high seller carrying costs because they take less time than other selling methods.”
Properties are generally sold “as is” with no financing contingencies. “A buyer may be allowed to seek financing, but contracts generally are not contingent upon the buyer getting financing,” Peterson says.
Real estate auctions usually have closing dates of 30 days or less.
Another pitfall is lack of disclosure. Franz says, “There may be no disclosures from the lender and there may be things you are unaware of, such as disputes between the former homeowner and the lender.”
For example, if the former owner and lender are involved in a litigation dispute, the buyer may unwittingly be dragged into it. “Unbeknownst to a client of mine, the former owner disputed the validity of the foreclosure process and the lender’s right to sell the property via an auction,” Franz recalls. The problem became a legal nightmare, and it was unavoidable.
Buyers typically hire bidders to bid on their behalf. Most auction companies charge the winning bidder a buyer’s premium, from 2 to 10 percent of the winning bid amount. “Factor this additional charge” into your calculations before deciding on a maximum bid, Peterson says. Don’t forget about additional closing costs or property transfer taxes.
Most importantly, though it may seem obvious, “Make sure you want the property before bidding. If you win and fail to perform under the Auction Real Estate Contract terms, you risk losing the funds you presented,” Peterson warns.
Here are a few more tips for buying a home at auction:
• Research the property: “Conduct a title search, seek title insurance if possible and conduct a search of the lawsuits and county records involving the property,” attorney Franz says.
• Read the fine print. “Before bidding, read the auction terms and conditions carefully with your attorney and the Auction Real Estate Contract,” Peterson says. “Consult a real estate broker to determine the property’s estimated fair market value. Review sales comparables for similar properties that have sold in the same area in the past three to six months.”
• Register your bid in advance. “You will need to register and present proof of funds and financial statements before being allowed to bid,” Peterson says. “Bring the required amount of certified funds to the auction.”
• If you cannot attend the live auction, register to bid online or ask the auctioneer to submit an absentee bid or send a proxy bidder to the auction to bid on your behalf.
• Ask for help if you don’t understand the auctioneer.
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