Real estate auctions offer the opportunity to buy a home quickly and for a potentially lower price. If you’re struggling to get an offer accepted through traditional house hunting methods, attending an auction could be a good opportunity. You should understand how real estate auctions work, what their advantages and disadvantages are, and how you can maximize your chances of success as a buyer.
What Is a Real Estate Auction?
An auction is a method of real estate selling where the property is introduced to potential buyers all at once, and buyers have the opportunity to make bids. The person or group that makes the highest bid wins the auction and proceeds to purchase the property.
Real estate auctions can be held live in-person, or they can be held online with a specific start and end date. Sometimes, auctions are simulcast, which means they occur both live and online at the same time.
Why Properties Go Up for Auction
Most people associate real estate auctions with foreclosures or bankruptcies. If the homeowner fails to meet their mortgage obligations, the bank will repossess the home. Usually, the bank sells the property at auction because it’s the fastest way for them to recoup their money. An auction can also happen if a homeowner defaults on their property taxes and the home is seized by tax authorities.
Not all real estate auctions result from financial hardship or foreclosure, though. In many cases, sellers choose to auction off their properties because it’s faster and easier than listing it on the market. They don’t have to negotiate back and forth with prospective buyers on costs or contingencies. They simply wait for the auction to close and award the home to the highest bidder.
Types of Real Estate Auctions
The following are the three main types of real estate auctions:
Absolute: In an absolute auction, the property is sold to the highest bidder with no conditions and no minimums. You could bid $10 on a house and win the auction if no one else makes a bid.
Minimum Bid: With a minimum bid auction, the seller sets a minimum sale price that is announced to the bidders. All bids must match or exceed this amount. In the case of foreclosures, the minimum bid is usually the remaining mortgage balance.
Reserve: In a reserve auction, the seller sets a bottom dollar amount but doesn’t share it publicly. You might see the phrase, “subject to seller confirmation.” This means that the seller can reject the final bid if they feel it isn’t enough. Because the seller can reject bids, participating in a reserve auction can feel similar to making an offer on a house. However, the seller cannot make a counteroffer in a reserve auction.
Types of Bids
There are two methods of bidding in a real estate auction: open and closed. With open bidding, you know what other bids have been made. This allows you to raise your bid gradually to stay in the lead without overshooting. It also gives you the opportunity to low-ball with your bid if there isn’t much interest in the property.
With blind bidding, you don’t know what others have bid. This system encourages buyers to make larger bids because they’re unaware of what the competition is doing. Blind bidding is preferable for sellers, but it’s not ideal for buyers.
Benefits of Buying at a Real Estate Auction
Transparency is one of the biggest advantages of bidding at a real estate auction. In a traditional real estate sale, you don’t know how many other offers the seller has received or what those offers look like. In an auction with an open bidding system, you know whether you’re the highest bidder or not.
You may feel more in control at an auction and more confident that you’re paying a fair price for the property. A home is worth what people are willing to pay for it, and an auction is an easy way to discover what people are willing to pay.
Real estate auctions are less popular than traditional home sales, too, so you may find it easier for your bid to be accepted. Especially when today’s housing market is so competitive, auctions could be a great alternative.
Additionally, the bidding process is usually faster than buying a home in the traditional way. You don’t have to wait for the seller to review your offer and possibly make a counteroffer. You’ll know right away if your bid is accepted. Closing typically happens very quickly with auctions, too.
Risks of Buying at a Real Estate Auction
Although there are plenty of benefits to participating in a real estate auction, there are also some disadvantages. Most importantly, auctioned homes are almost always sold as-is. Auctioneers usually don’t allow buyers to inspect a home before bidding, and if you win the auction, you’ll be responsible for the repairs and renovations. Prepare for the worst and make sure you have extra funds to fix up the home after closing.
Psychologically, auctions can be tricky to navigate as well. Multiple bidders could drive up the price beyond what the home is worth, so you have to be ready to walk away at any time. Going to an auction without a strict budget and a clear plan of action could result in you making a regrettable decision.
Tips for Bidding
Bidding at a real estate auction can feel daunting for first-timers, but it’s a great experience as long as you have a game plan. Consider attending live auctions or watching auction livestreams before you actually bid on a property. This will help you understand how they work and get familiar with the language used, so you’ll feel more confident when you do start bidding.
Before attending an auction, do your research on the property. Look into the sale history, and find recent sale prices of comparable homes in the area. It’s also wise to conduct a property lien search with your town clerk or county recorder. If the auctioneer holds an open house, search the home carefully for signs of disrepair.
If you’re not paying cash for the home, have your financing in place before you attend the auction. Many auctioneers won’t let you make a bid without a pre-approval letter. Your pre-approval will also help you set your budget.
Setting and sticking to your budget is the best thing you can do when bidding at an auction. Decide on a maximum amount you’ll bid, and stick to it no matter what. Your maximum bid should be below your pre-approval amount so that you have room in your budget to make repairs and upgrades to the property.
A real estate auction can be an excellent opportunity to purchase a home at an affordable price and with a quick timeline for closing. Consider attending an auction if you need a break from the traditional home search. If you do your research, set a budget, and consult with a real estate agent, you have a great chance of success at an auction.
