How Does a Real Estate Auction Work (Part 3)
What are some ways to finance your property purchase at an auction?
Before arriving at the auction you should have your financing in place. Although some auctions may allow you to finance your purchase, many do not. Even if the auction allows you to use traditional financing options, you may lose out to a cash buyer if your loan approval takes a while to obtain. So it’s best if possible to use either cash, a cashier’s check, money order, or a line of credit. Personal checks are unlikely to be accepted. Some auctions allow the use of credit cards, but this can be a financial risk if you have high interest cards or don’t have a way to pay off the balance quickly, and could also harm your credit if you wish to obtain a line of credit or mortgage in the future. Working on keeping your credit rating high will help you save money on interest rates and insurance, as well as secure additional financing in the future, so keep this in mind. (Note that you may be required to use a credit card when you register to put down a deposit.)
Often you will need to pay in full at the conclusion of the auction, so bring proof of funds, or if you are using a loan, bring a pre-approval letter as well as the required deposit. (Your deposit will be held in an escrow account until your purchase or the conclusion of the auction if you do not make a purchase.) Be sure to have funds ready to pay in full by the time and date required. There are a few states that allow you to pay a percentage at the close of the auction and the rest on a schedule, such as within twenty-four hours, or within thirty days after the auction, for example. Some auctions such as county auctions may require an advanced deposit as well. If you win a bid then your deposit will be applied to your purchase, otherwise it will be refunded after the auction.
If the winning bidder does not provide the full payment within the allotted timeframe, the bidder with the second highest bid is offered the property at the price of their highest bid from the auction.
Some investors set up commercial lines of credit at their bank before shopping for properties. This allows them to make cash offers, as well as have funds available immediately to draw on it for renovations. Another financing option used by some investors is a “Hard Money Loan.” This is a higher interest loan meant to be paid back in a short time after the house is renovated, either by switching to a conventional mortgage (remember the rates are more if it’s not your primary residence) or by selling the home if you are flipping.
Don’t forget to check with the auction company to see if there’s a broker co-op or buyer’s premium that you’ll also have to pay. The broker co-op fee goes to a listing agent, while the buyer’s premium is a fee that the auction company charges for the transaction. The buyer’s premium may be paid by the bank or seller, but if not, you may be responsible for it, and it may be around 5% or higher.
Include any title insurance fees in our budget as well as attorney fees if you need to evict occupants after your purchase.
Should you get title insurance?
Do a full coverage title search on any property you plan to bid on. You can do this search yourself at the local courthouse or online in some jurisdictions, or hire an attorney or title insurance company to help you. It’s highly recommended that you purchase a title insurance policy so that you don’t end up with more liens than expected. You may be responsible for undiscovered liens not cleared in the foreclosure process, or have other titles issues.
You should also research in the local records if there are any permits open on the property since you may be financially responsible for closing them out after your purchase.
What is the time frame for taking possession of a property purchased at an auction?
The time between the winning bid at an auction and obtaining possession of a property can vary greatly, and in some cases, as mentioned above, you may never get possession of the property and the sale will be canceled – or you will be repaid for any lien that you purchased plus the agreed upon interest in the case of a tax sale.
When purchasing directly from a bank’s REO listings, you will want to inquire at the specific bank about how long it takes them to process offers.
Until you have a certificate of title, the property is not yours. Additionally, you usually will need to record the deed with the county yourself, since auctions do not always do this for you. The former property owners are not required to leave the property or remove their personal items until the foreclosure is complete and all proper requirements for paperwork and procedures have been fulfilled.
At this point, if the former owner is still occupying the property, technically they become your tenant by default, and you will need to file eviction proceedings. You cannot enter the property until you have the legal right to do so, and if the property is occupied at the time of your purchase by a previous owner, a renter, or a squatter, you should consult a qualified real estate attorney to help you understand the laws regarding each of these occupants. They will file the proper paperwork to evict the occupant, and a sheriff will conduct the eviction. The evicted party is not allowed to take from the property anything other than their personal property, so they must not remove fixtures, trim, or built in cabinets, for example. They may, however, be allowed to remove appliances along with any other movable property such as furniture.
You will not be able to freely enter the property until you have legally vacated the occupants. If you need to evict tenants or a former owner or squatter, you will need the assistance of a qualified attorney so you do not find yourself in violation of the law or in a long and expensive legal battle. State laws vary greatly, so do not expect the same procedures you used in one state to be the same in another.
So keep in mind that purchasing the property at an auction may be just the first of many steps before you actually possess and have full control of the property.
A word of caution!
Auctions create an emotional environment and a sense of competition and urgency. This tends to drive up the price of properties, so remember not to get carried away bidding once the price exceeds the value or the budget you set before you arrived. Be aware that the plaintiff’s representative may also be at the auction bidding in an attempt to drive up the price.
It’s risky to purchase a property without an inspection or seeing the interior. Everything may look OK from the outside, but there may be costly renovations needed. You may unexpectedly end up with a property with significant foundation issues, no kitchen or bathroom, or no working plumbing or electricity. If you purchase a foreclosed property that has been empty and winterized, meaning the water has been shut off, blown out of the pipes and antifreeze has been place in toilets and p-traps, you may not know if there are major leaks or plumbing issues until you turn the water back on.
Other risks of purchasing properties at auctions include unexpected legal fees, such as evicting squatters, or dealing with lawsuits by the property owners that have not been recorded yet at the time of the auction, such as lawsuits against a bank for a wrongful foreclosure. These legal battles can drag out for a long time while you are paying carrying costs on the property.
Beware of attempting to purchase properties from questionable places such as online auctions that are not highly reputable, or Craigslist. There may be legitimate opportunities on these sites, but do thorough research before entering into any transaction, and consider purchasing from more traditional places. If it’s too good to be true, remember it probably isn’t real, so don’t get scammed. There have been many news articles in recent years about people giving a rental deposit or downpayment to someone who showed them a home that they don’t even own. I’ve done showings for my rental properties for almost twenty years and not a single potential tenant ever questioned if I had the legal right to rent the home, so beware of scammers who may take advantage of this type of trust. Just because they have keys or are able to get you inside the house, doesn’t mean they have the right to sell it to you.
Remember that 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, and if you are subordinate to another claim, you may actually have to surrender the property. In that case, you should be reimbursed for your purchase of the tax deed by the new title holder, but it’s a situation worth trying to avoid with a title search whenever possible.
Not all foreclosures are a great bargain, so do your research so you minimize surprise expenses or legal issues, and so you don’t overpay for any property.
What are some alternatives to auctions for buying below-market properties?
Properties that are under market value most often have a distressed seller. This can mean they are about to be foreclosed on, or are behind on taxes, or are owned by someone who has recently lost their job or has become ill and wants to downsize their expenses, or an heir to a property who wants to unload it quickly.
Purchasing these types of properties at an auction can come with a lot of risk, especially when you’re not allowed inside the property if it still belongs to the foreclosed homeowner. To reduce your risk, you may want to consider other alternatives for purchasing foreclosed properties. Check out some alternative methods here: