Buying houses at auction is a fast process where undervalued properties are sold to the public through competitive bidding. Auctions are either in person or online and can be advantageous for a fix and flipper and a long-term investor. Most auctions require a 5% to 10% deposit the remainder within 30 to 45 days (if you win).
Here are six steps to buying houses at auction.
1. Understand How Real Estate Auctions Work
Real estate auctions offer a range of properties at different price points. They include such things as single-family homes and multifamily units as well as some commercial properties and real estate notes. There are auctions for foreclosures, short-sales, and nondistressed real estate owned (REO). Furthermore, auctions can either be conducted online or in person.
Real estate auctions happen in real-time or over a few weeks and start with a minimum price. From there, an auctioneer will allow competitive bidders to bid up the price of the property until a single bidder remains. At this point, the auctioneer will close the auction and award the property to the winning bidder. Depending on the auction, the bidder will either need to pay for the property immediately or pay a 5% to 10% deposit and the remaining balance within 30 to 45 days. Check out our section on the different types of auctions below for more information.
A common misconception with buying houses at auction is that you can only purchase a house at auction all-cash, and this isn’t true. While the speed of auctions benefit all-cash buyers, you can still finance a house at auction through traditional loans. The downside, however, is that approval might take too long. Of course, always do your research before coming to a financing decision. For more information on financing houses at auction, jump down to our financing section.
2. Set Your Investment Parameters
The next step when buying houses at auction is to set your investment parameters. Specifically, know what you’re looking for in a house and what your constraints are. Each parameter limits your investment search to more specific opportunities and helps you find an auction in the next step.
When coming up with your investment parameters, you should consider the following criteria.
Investment Objective and Timeline
You’ll want to establish your specific investment objective and associated timeline before you bid on a property at auction. These will affect your financing options as well as the size, location, price, and condition of the houses you bid on.
Fix and flippers and rehabbers, for example, look for properties that they can repair and sell quickly for a high after repair value (ARV), which is the price of a home after it’s been renovated. Generally, short-term investors want ARV to be 30% higher than the purchase price, and they want the timeline to be as short as possible. The longer your timeline, the higher your carrying costs, so it’s important to get the repairs done as quickly as possible.
A long-term investor focuses less on ARV since they plan on keeping the property and renting it out. Instead, they’re more concerned with the loan-to-value (LTV) ratio. While their investment horizon is longer than a fix and flipper, long-term investors also want a fast timeline season the property quickly since they incur carrying costs as well. There isn’t an exact set timeline in weeks or months since different scopes of projects take different amounts of time to finish.
Financing Options for Real Estate Auctions
Your objective and investment timeline dictate the financing options available. All-cash offers are the preferred method of payment for an auction. All-cash offers aren’t subject to lender requirements and help facilitate quick transactions between the bidder and seller.
However, if you can’t purchase an auction property all-cash, you’ll need to obtain financing from a lender. This is where the investment objective and timeline are important. Short-term investors, such as fix and flippers, usually rely on hard money loans to finance their investment. Long-term investors, such as the buy-and-hold type, typically use conventional mortgages with longer terms. These financing options affect your maximum auction budget.
We discuss the different financing options in-depth below.
Your investment objective, timeline, and financing options help determine your overall budget. Fix and flippers, generally, use hard money loans that have an ARV limit. Many hard money lenders loan out between 65% to 80% of a home’s ARV. This means that they might have to put down as much as 35%, limiting their budget.
Conversely, long-term investors rely on traditional mortgages that usually require 20% down. This results in a maximum loan-to-value (LTV) ratio around 80% and sometimes also a loan-to-income (LTI) ratio around 50%, limiting a long-term investor’s budget. The LTV ratio dictates how much of the total price a bank can lend, and the LTI ratio helps banks assess the ability of borrowers to pay back the loan. Some long-term investors, however, can obtain FHA loans with as little as 3.5% down.
It’s important to note that winning bidders are charged what’s called a “buyer’s premium.” This is an additional fee paid to the auctioneer to cover all administrative expenses. The buyer’s premium typically is around 10% of the winning bid and is disclosed at auction prior to the start. Make sure you leave yourself at least a 10% contingency to cover the buyer’s premium.
In general, you should budget for the following:
- Financing costs: Down payment amount 20% to 35% of the purchase price and one to three points plus any other lender fees
- Holding costs: The monthly costs to keep the property including mortgage, taxes, insurance, and utilities
- Repair costs: How much the repairs, supplies, and labor cost, which vary widely by area and property condition
- Marketing costs: The amount you need to spend to sell or rent out the property including advertising and open house costs and some people include real estate agent fees here too which are usually 6% and are paid out of your proceeds from the sale
Your investment objectives, timelines, financing, and maximum budget dictate the characteristics of the properties most suited for your needs. A property’s size, condition, geography, and type are all characteristics you’ll want to define when setting your investment parameters.
Long-term investors look for solid investments with rental potential, limiting the available options. For example, the size, condition, and geography of a house affect its occupancy rate and target tenants as well as the size of the minimum down payment. A house’s condition also affects the upfront cost. It may need repairs and maintenance before it can be rented. Its geography affects long-term price appreciation, annual rental income, and the availability of tenants.
Short-term investors look for underpriced houses in poor condition, also limiting their searches. The desired size, condition, and geography of a house affect a short-term investor’s down payment and “skin in the game.” Since hard money lenders base their loan amounts on a percentage of ARV, the pricier a house, the more money down it needs. A house’s size, condition, and geography also affect the potential short-term profit of a fix and flipper.
New investors may only consider certain types of properties, such as single-family homes or condos, where more experienced investors may look for one- to four-unit multifamily properties or apartment buildings. Certain types of properties are more prevalent in certain areas, so this may limit your options as well.
What’s more, the geography of a house dictates the contractors and/or property managers you’ll rely on. Fix and flippers need to ensure that there are reputable contractors available to do the work when needed, while long-term investors need to look for established property management companies. If you’re unfamiliar with an area, it can extend your overall investment timeline and cost you money. Better to stick to what you know.
3. Find & Register for a Real Estate Auction
Real estate auctions are held both live and virtually. Live auction listings can be found on leading auction websites as well as through real estate agents and other industry professionals. Virtual auction listings can also be found on leading auction websites and through industry professionals as well as on virtual auction sites.
A real estate auction listing contains such information as a property’s type, size, starting bid price, required deposit, registration requirements, date of auction, appraisal, and more.
Where to Find a Real Estate Auction Listing
There are generally four ways to find a real estate auction listing. Different investors feel comfortable using different ways to find these properties. Each way has its own pros and cons to consider, but it’s best to look for auction listings in multiple places so that you have the highest chance of finding them.
Specifically, the four ways you can find a real estate auction listing are through real estate auction sites, industry professionals, county courthouses, and real estate classifieds.
Real Estate Auction Sites
There are many online real estate auction sites, and some of them offer both in-person and virtual auctions while others only offer virtual auctions. Check out the sites and browse around and see what types of auctions they offer, and the auction requirements, and then start looking for houses to bid on.
Leading real estate auction websites include:
Professionals within the real estate industry often know about upcoming auction listings. These professionals include real estate agents, brokers, and third-party foreclosure sales agents, also known as “trustees.” Bankruptcy lawyers and bankruptcy accountants are also good people to engage when looking for opportunities.
You can find industry professionals by getting referrals from friends, family, and other investors. You can also join a real estate investment group in your area or search for your local real estate agent and ask who at their office deals with real estate auctions. Most major real estate companies have agents who specialize in auctions. You can also contact bankruptcy attorneys, divorce attorneys, or foreclosure attorneys by doing an online search with a major search engine.
Your local county courthouse has a list of all upcoming real estate auctions in the area. This option, however, limits your search to the local county. You can obtain real estate auction listing information either online at your local courthouse website or in-person at the courthouse itself.
To contact your local courthouse, Do an internet search of your county’s website address and visit the homepage that lists their contact information. From there, they will be able to direct you to their auction page and tell you what building auctions are held in and when they’re held.
Real Estate Classifieds
While somewhat archaic, real estate auctions still list properties in local newspapers. Some of these newspapers have an online presence too. It’s best to combine using real estate classifieds with another method of finding auction property listings.
Live Real Estate Auctions vs Virtual Real Estate Auctions
Live real estate auctions are held in-person and are probably the kind of auctions you’re most familiar with. Live auctions are free to attend and are open to the public. Virtual auctions are held virtually ― or online ― and can occur in live time or over a period of a few weeks.
Live Real Estate Auctions
Live real estate auctions require that all bidders register prior to attending the auction. You can register online by following the instructions found on the auction listing. As part of the registration process, you’ll be required to provide certified proof of sufficient funds.
This is typically a cashier’s check made out to yourself that’s equal to 5% of the opening bid price. The auctioneer usually verifies that you’re registered and have the correct deposit. If you win your live auction, you’ll be required to pay between 5% to 10% of the closing bid price within 24 hours.
Afterward, you’ll have 30 to 45 days to make payment in full and transfer the title. If you fail to make a payment, the auction house keeps your down payment and re-auctions the house. Some live auctions also charge interest on the money owed until the full price is settled. We dive deeper into live auctions in the sections below.
Virtual Real Estate Auctions
Virtual real estate auctions, on the other hand, are real estate auctions that occur entirely online. They either happen in real-time like a live auction or span days or even weeks. In these days’ long auctions, participants have the opportunity to bid 24 hours a day, seven days a week, until the auction listing closes.
Real-time auctions operate on a bidding countdown clock that’s typically two to three minutes. If no one bids after the clock expires, the final bid is awarded the property. If someone bids within the time allotted, the clock resets. Participants in virtual real estate auctions can even set proxies to place a bid automatically if someone outbids them. Think of a virtual auction as eBay for real estate properties.
As with live auctions, virtual auctions require that all potential buyers register online through the virtual listing. The registration process requires that bidders place a 5% deposit before bidding on a piece of property, which limits the maximum budget in a virtual auction. The deposit can be paid by cash, certified check, or credit card.
However, unlike live auctions, virtual auctions require that the winning bidder make full payment within a 24-hour period. If the bidder fails to make payment, the virtual auction house keeps the 5% down payment and re-auctions the property. Again, we take a deep dive into the virtual auction process in the below sections.
Types of Real Estate Auctions
When looking at real estate auction listings, keep in mind that there are three different types of auctions. Each auction has its own requirements for bidding; this dictates the type of properties listed as well as the investors they attract.
An absolute auction is a standard real estate auction where the sale of a property is awarded to the highest bidder, regardless of its final price. These can be in-person or online auctions. There is no minimum bid amount as the property can sell for any price. Sellers in need of quick cash use an absolute auction.
Banks, for example, sometimes hold absolute auctions for foreclosures or nondistressed REOs to recoup some of their delinquent loans. People in financial distress also hold absolute auctions for short sales. All-cash buyers and short-term investors typically frequent absolute auctions.
Minimum Bid Auction
A real estate auction where a seller can set a minimum reserve price on the property. If the winning bid doesn’t meet the reserve requirement, the property remains unsold. Minimum bid auctions typically occur during estate sales and sales of property where the owner isn’t distressed. They can be online and in-person.
Banks will also sometimes conduct a minimum bid auction if they don’t need to sell a foreclosure quickly and want to recoup a specific percentage of a delinquent loan. For these reasons, minimum bid auctions attract more long-term investors, although short-term investors also participate.
With this auction type, the winning bid becomes an offer rather than the sale price. The seller reserves the right to accept or reject the winning offer. Again, this is most common when the seller isn’t distressed, such as with an estate or with a bank, so it can be unattractive to short-term investors. These auctions are usually done virtually.
Long-term investors, on the other hand, might find an excellent long-term investment in a reserve auction. However, fix and flippers can still find opportunities at a reserve auction.
Types of Sales You Will Find at an Auction
There are different types of sales at auctions, and it’s important to research each type of sale before making a bid or an offer. You also want to find out if you can view the inside of the property before the sale and if you’re buying the property subject to any liens on it.
Types of sales include:
- Foreclosure: A legal process where a delinquent owner forfeits the rights to their property. A home can be considered “foreclosed” if it doesn’t sell in a short-sale and goes to a foreclosure auction. As of December 2017, 31.6% of foreclosed properties were up for auction.
- Nondistressed REOs: A class of property owned by a lender. REOs occur when a foreclosure doesn’t sell at auction, and the lending institution repossesses and sells it at an auction of their own.
- United States Department of Housing and Urban Development (HUD): HUD auctions off homes that were foreclosed on by a federal agency, instead of a private lender. For example, a borrower defaults on a Federal Housing Administration (FHA) loan, and the home could end up at a HUD auction.
- Tax lien: This type of sale is a little bit different than the others. A property goes to a tax lien sale when the property owner is delinquent on property taxes. As an investor, you’re buying the tax debt or the deed to the property. You can collect this tax debt plus interest, or you can foreclose on the owner and then take possession of the property.
- For sale by owner (FSBO): This type of sale isn’t as common as the other ones, but it does exist. Some sellers don’t want to hire a real estate agent and don’t want to wait for the traditional offer to be made, so they list their home on an auction site as a FSBO. The homes are in varying conditions, and the mortgages are usually up to date.
4. Line Up Your Real Estate Auction Financing
Hard money lenders and traditional lenders allow investors to prequalify for loans prior to bidding on a house at auction. The three most common loans available to investors at auction are hard money loans for short-term investors, conforming mortgages for long-term investors and nonconforming loans for both long and short-term investors.
All-cash is the preferred type of financing when it comes to real estate auctions. This is because listings at real estate auctions move fast and cash, since it isn’t subject to lender requirements, provides maximum flexibility. However, many real estate auction investors will use one of the three financing options below.
Hard Money Loan vs Conforming & Conforming Mortgage
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Hard Money Loan for Real Estate Auctions
Fix and flippers, rehabbers, and other short-term investors often rely on hard money loans because of their quick approval process and short loan term. Hard money loans include such things as fix-and-flip loans and rehab loans as well as government-sponsored Freddie Mac HomeSteps loans for foreclosures.
Hard money loans are usually used to finance houses that require repairs and maintenance. They have a short approval time and a short-loan term between one month and two years. They’re used at auctions by short-term investors to obtain quick financing and compete with the fast timeline of all-cash buyers. However, hard money loans typically have higher interest rates than their conventional mortgage counterparts.
If you’re ready to purchase a property at a real estate auction, contact Kiavi to see if you qualify for financing. Get a quote from them online in just a few minutes. It offers competitive rates for prime borrowers.
Conforming Mortgage for Real Estate Auctions
Conforming mortgages can permanently finance investment properties found at auction. Conforming mortgages are obtained from major financial institutions, mortgage providers, and mortgage brokers. The FHA insures them, so they offer less risk to lenders, and this translates to lower rates and down payments but stricter qualifications.
Conforming mortgages typically require that a house is near move-in ready. Furthermore, they take over a month for approval, have a 15- to 30-year loan term, and have interest rates between 4% and 6%. For these reasons, conforming mortgages are usually used by long-term investors who expect to buy-and-hold a piece of property.
You can approach traditional lending institutions and seek preapproval for a loan. You can then use that preapproval, which includes the down payment, to bid confidently with a maximum budget in mind. Lending institutions will typically loan up to 80% of the total purchase price, and they don’t fund renovations.
Some investors also use conforming mortgages for “cash-out refinancing.” What this means is that an investor purchases a house at auction all-cash and then searches for another auction opportunity. When a new opportunity arises, the investor refinances the first house with a conforming mortgage and uses the cash from the refinance to bid on the new house, after which the cycle continues.
Examples of conforming mortgages include:
- FHA 203(k) Loan
- FHA Multifamily Loan
- Homestyle Renovation Loan
Nonconforming Mortgage for Auctions
Nonconforming mortgages are also used by real estate investors to buy properties at auctions. They don’t have to adhere to FHA guidelines and aren’t insured by the FHA, so the lender is taking on more risk. This often translates to higher interest rates.
Remember that you want to work with a lender before you bid on a property. Once you start researching auctions, choose a lender, and get preapproved for a nonconforming loan. This preapproval is usually good for 60 days, so you can bid on a property and still stay within the auction deadline of closing on the property within 30 to 45 days.
Nonconforming mortgages vary widely from lender to lender, but also vary based on the type of loan. They can be used to buy multifamily properties, apartment buildings, commercial properties, and multiple properties at once, so you can bid on multiple properties at different auctions. They’re used mostly by long-term investors, but short-term investors use bridge loans so they can acquire a property quickly until permanent financing is an option.
Nonconforming loans include:
- Multifamily loan: For properties with two to four units
- Apartment loan: For properties with five-plus units
- Bridge loan: Helps with bridge financing if you need to season the property before refinancing with a long-term loan
- Commercial loan: For commercial properties
- Blanket mortgage: For multiple properties financed under a single loan
5. Participate in the Auction
Live auctions and online auctions have the same general bidding process. We talked to industry professionals Brian Davis, Ernie Rafailides, and Sepehr Niakan and asked them about the real estate auction process. According to them, once you’ve outlined your investment parameters, identified a listing, secured financing, and registered online, you should expect the following on auction day.
Davis, the co-founder of SparkRental, tells us that for live auctions, the first thing is that “All bidders need to bring certified funds for the initial deposit. You can get a bank check made out to yourself, which you can then assign to the auctioneer if you win. The auctioneer verifies each bidder’s funds, and their registration information before the auction starts.” You register online with the auction house prior to attending, and the typical deposit is around 5% of the opening bid price.
Davis goes on to tell us that “Before the auction starts, the auctioneer shares some brief information about the property. They’ll explain the terms of the auction, such as the down payment needed and when the winner needs to settle by.”
From there, the auctioneer starts with an opening bid, and registered participants can place a bid with a numbered paddle―assigned to them during the registration process―or something similar. For a look at what a live auction might look like, check out this video below:
As a tip for new participants, Rafailides of Bayview Management reminds us to:
“Stand where you can see all the action. You’ll want to know who’s bidding. You may see the same players bidding at multiple auctions. Furthermore, you don’t want to rush the bid. See where everything shakes out. Ultimately, you should have a price in mind and not be afraid to walk away.”
Davis also mentions that “Auctions typically give buyers access to the property within an hour or two of the sale. Buyers don’t have much time to evaluate the property’s condition and decide on a max bid. If you don’t have a contracting or home repair background, take someone with you who does because you’ll need to make a cost estimate on the spot.” This means that you should always arrive at an auction early, check-in with the auctioneer, and walk the property as soon as possible.
The virtual auction process is much the same. Niakan of CondoBlackBook tells us that virtual auctions are “just like any other bidding process. All participants are required to submit a 5% down payment during online registration. For real-time auctions, each bid resets the countdown clock a few minutes to allow time for the next bid, until the bidding stops.”
Sepehr goes on to mention that for virtual auctions, “You are only allowed to bid up to the point where your deposit reaches 5% of the total bid amount, which limits your budget. You’ll want to submit an online deposit equal to 5% of your max budget. Further, the virtual auction houses don’t care if you have the remaining 95% because if you don’t, they just keep your 5% deposit and relist the house, so be careful how high you bid.”
Ultimately, Davis says it best when he tells us that “Most first-time bidders like to get a feel for an auction before they start bidding.” You might want to participate in your first virtual or live auction without actually bidding.
6. Win the Auction & Close on the Property
If you did everything right and followed your parameters, your reward just might be a new investment property. If so, there’s a specific process for both virtual auctions and live auctions that facilitates the sale. The general process is that you pay the winning bid amount and work with a title company to transfer ownership.
Generally, the auction process for an in-person auction is as follows:
- Win the bid for the house at auction.
- Pay the deposit amount within the allocated time frame, usually within 24 hours.
- Get a loan on the property if you’re using financing. You will already have a preapproval.
- Use a title company and close on the property, which is the same process as buying a normal house.
For live auctions, Davis tells us that the auction winner is required to submit a total deposit between 5% and 10% within the first 24 hours. From there, “The buyer usually has 30 to 45 days to settle payment and transfer title. If the buyer fails to settle during this time, the deposit is usually forfeited. Most auctioneers require a specific title company to facilitate the title transfer, and you’ll be provided with that information upon winning.”
Once the title’s successfully transferred, the winning bidder receives the certificate of title and the keys and officially owns the property. However, when it comes to winning a live auction, Rafailides tells us that “A gavel fee is usually awarded to the auctioneer. As the winning buyer, you’ll be responsible for all settlement costs and transaction fees as part of the final price, typically up to 10% of the winning bid.”
Rafailides goes on to tell us that “most importantly, from the final gavel to when you settle the full payment, some auction houses assess interest on the money owed. So, not only does settling fast speed up your property ownership, but it saves you money too.”
Niakan points out that the winning process for virtual auctions is a little different. Winning bidders “have to pay the full amount within 24 hours. You get a certificate of sale soon after, and then you’ll typically have 30 days to transfer the title and own the property. The online auction house facilitates title transfer. However, you don’t get a free and clear title. You inherit everything on the title except for the original mortgage, if any.”
We discuss what to watch out for below in regard to title, liens, condition, and rights of redemption.
Other Things to Consider Regarding Real Estate Auctions
Sepehr brings up a good point. “Winning bidders,” he says, “are responsible for any liens, condition issues, encumbrances, or something similar.”
When looking to buy a house at auction, it’s important to consider the following:
- Title: A house’s title is evidence of ownership. Does the property you’re looking at have a clean title? A clean title is one that shows a chain of ownership without any legal problems. All of these questions can be answered with a title search. Sepehr tells us that you can use a “title or escrow company to help run title searches.” You can also call your local register of deeds for title information.
- Liens: A lien is placed on a house when creditors seek to collect delinquent payments. If a home at auction has a lien, the purchaser of the home might become responsible for the lien. Similar to a title search, a title or escrow company can help you identify any liens. Alternatively, you can search the county clerk’s online records or visit the county clerk’s office in-person.
- Condition: Have you done your due diligence and conducted a drive-by or walk-around of the property? The condition of a house dictates, among other things, its suitability. A house in poor condition is ideal for a rehabber or a fix and flipper while a house in good condition is better for a buy-and-hold investor. Remember that you might not be able to walk the property until a few hours before the auction. If you can, do a drive-by assessment before you decide to participate in the auction.
- Right of redemption: Some states give the original property owner a right of redemption. In these cases, the previous owner has a specific amount of time to keep the house if he or she pays the winning bid price plus interest. Payment is made directly to the winning bidder, stopping the house from being sold.
Brady Hanna, the president of Mill Creek Home Buyers, cautions against buying a property sight unseen because:
“It may have mold, need to be entirely gutted or be in worse condition than your budget allows for. If you haven’t seen the property, don’t buy it and try not to get caught up in the frenzy of bidding on properties at auction.”
Buying houses at auction is a unique way to invest in property and has many benefits. Investing in a house at auction can benefit short-term investors as well as long-term investors. By following the five steps for buying a house at auction, as detailed in this article, you’ll be in a good position to snap up a great, undervalued property.