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Home Auctions — What to Consider

In our current real estate market, buyers and sellers are sometimes using less traditional methods to buy and sell homes.   It is possible to buy or sell a home at an auction.  Sellers can use an auctioneer to sell their homes — even eBay has a way to sell a home!   Lets examine when an auction might be a good idea for a seller….

Auctions can be a legitimate tool for certain sellers.   Auctions can result in the sale of a property faster than a “normal sale” — there is a defined marketing period, the auction and then a fixed number of days to close.   A property could be marketed for 30 days, have the auction held, and then close in 30 days.   An auctioned property could close in 60 days.   The average days on market for listed homes in many areas is much higher.  There are a couple other advantages to an auction that make it a speedier process — properties as sold “as-is” and are not conditional on financing.   Buyers cannot cancel the contract because they cannot get a loan or they find out the homes needs a new roof — the buyers generally will lose their deposit should they back out prior to closing.

Sellers are generally responsible for the cost of marketing a property to be auctioned.   An auction relies on having lots of potential buyers that want to bid in order to get the maximum price so exposure of the property is key.   The property should be advertised through as many mans as possible — print, direct mail, online, and signs.   An auction company may help with this aspect but this is generally a charge to the seller upfront.    Generally if a property is listed by a real estate broker, the broker covers the cost of advertising.   An additional advantage to marketing for an auction is that “showings” would be very limited — perhaps to a 1 or 2 day preview so there would not be a long period of keeping the home tidy and dealing with numerous showing appointments.

The cost for the auction itself is usually a buyer cost paid as a premium to the purchase price.    This is different from most real estate commissions that are normally paid by the seller.

Sellers can set a reserve price for the property.   This is the minimum acceptable bid for the property.   This amount should be sufficient to payoff all the liens on the property so a clear title can be delivered to the buyer plus cover any other required fees for transfer of the property.   If the liens on the property exceed the market value, an auction will not be possible unless the seller has additional funds to payoff the existing liens. 

Buyers are also considering auctions as a means of buying homes.   Can you get a bargain??   Probably not but you might find a reasonable deal.

Buyers considering buying at an auction need to consider two big issues — you must have the money ready to go and the properties are sold “as-is”.   So what might be an advantage to the seller is a disadvantage to a buyer.   Properties can be either a foreclosure auction or the type of auction described above.

Financing a property obtained through auction can be tricky — banks will generally not give you a mortgage for an auction purchase.    Mortgages are hard enough to get for a “normal” purchase.   It is possible to get hard money loans from investors or other sources but the interest rate is usually much higher that a purchase loan — somewhere between 12 and 18 percent!!   If you do not have a large down payment, financing the property may be almost impossible.   The financing need to be arranged before the auction — some states require payment within days on foreclosures.

The condition of the home can also be a major consideration.   Homes sold at foreclosure auctions may not be available for inspection — you might not be able to inspect the interior of the home at all.    If the seller is auctioning the home, there would probably be an opportunity to at least view the inside.   The normal inspection that most buyers do that would involve a more detailed look at plumbing, heating, roof, etc is not possible on many properties being auctioned.

One further caveat on foreclosure auctions — NEVER buy a lien that is not in first position or you might lose all your money.  The first lien could foreclose and all the subordinate liens would be wiped out!   Foreclosure sale homes come with all existing liens — tax liens, mechanics liens, etc.   It is a good idea to get a title report prior to bidding.

If you have additional questions, give me a call at 303-402-6000 or email me at karenb@bernardirealestate.com

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