How Does a Real Estate Auction Work (Part 2)
How to do your due diligence before making a purchase at an auction:
When doing your research to find a good auction, choose a highly reputable company, and be sure you understand what type of auction you are going to be attending so you know if you are purchasing a tax lien or a foreclosure.
Check out the properties you want to bid on before you arrive. Many sheriff’s offices have websites listing their properties or lists available if you visit them in person. These properties are also often advertised in local newspapers. Sometimes a lot of information about the properties is available through the auction company, sheriff’s department, or bank websites, such as lien information and estimated value. These sites may offer photos of the interior that you can check out as well. Sometimes an open house may be held at a property so you would have an opportunity to bring your contractor and get an idea of what repairs will be needed.
For properties you cannot tour before the auction, you can drive past them instead and take a look at the exterior and the surrounding neighborhood. But do not trespass on the property, and do not bother the current occupant if there is one. These can be criminal offenses! If the properties are still occupied, (as they often are), then you will only be able to see the property from the street and check out the surrounding area. If they are occupied, that usually, but not always, means they have working electricity and plumbing. Nevertheless, you should budget for replacement of both in your renovation costs in case they are not functioning or up to code. Working with a local real estate broker if you are not one yourself can help you understand what homes in the neighborhood will sell for after renovations.
You won’t typically be able to have a home inspection before closing as you would in a standard real estate transaction, so understand that you will be buying the property “as is.” However, there may be an inspection on record from the bank or the most recent owner, but keep in mind they may not reflect the current state of the property. A real estate broker may be able to help you find records of previous inspections.
If you see neighbors out or a mail carrier, you may be able to ask them some questions about the house and the neighborhood. They might also be able to let you know if there are squatters living in the property so that you can be prepared for any eviction proceedings necessary. There are legal protections for squatters in many states, so consult an attorney who can inform you about local laws and help you with the process.
Research the property value as much as you can before the day of the auction, and figure out the budget you want to allocate to that property. Try to stick to your budget even if you get caught up in the excitement of the bidding process.
You can also do a title search at the land records office to see if any liens are recorded with the deed, or use a title company that offers insurance with their search. This will help you discover any other liabilities or liens on the property that you will be responsible to pay after your purchase. Many liens may be removed after an auction sale, but this is not always the case. It’s not unusual for properties at auctions to have HOA liens, mechanics liens, tax liens, and many other types of liens, so it’s certainly best to know what you will be responsible for before your purchase.
Note that tax liens are not removed with the foreclosure process, so you will want to be sure you know the amounts of any liens before your purchase. Otherwise you may find that you have purchased a property for a low price, such as $10,000, but are going to owe a huge tax bill, such as $20,000 in back taxes and fees. There are other liens that may not be extinguished with foreclosures, such as code enforcement liens, child support liens, utility liens, and more, which can differ by state.
Additionally, when you purchase a foreclosure from a tax sale it may be transferred with a quit claim or sheriff’s deed that does not make any title guarantees or warranties.
Your due diligence also should include researching the auction itself. Especially with online auctions these days, it’s too easy to get caught by a scam. Be careful not to participate in any auction without verifying it’s legit and reputable!
Manage your expectations.
Sometimes you may do a lot of research about a property you wish to purchase and when you arrive at the auction it’s no longer available. This can happen if the owner pays off the unpaid taxes or mortgage bills, or if a short sale has occurred.
You won’t necessary win the bid even if you offer more, either. Some auctions, such as HUD auctions, may give preference to people who plan to live in the home, and most auctions will take a buyer most likely to close, (for example those paying with cash), over the highest bid.
Even if you have a winning bid on a property at an auction, that doesn’t mean the property is yours yet. The owner could still pay off their debts before you receive the certificate of title, so until you have the title you are not the property owner and cannot act as if you are.
Learning from a more experienced bidder will help you navigate the process.
Continue reading about some ways to finance your property purchase at an auction in Part 3: