Buying a house is a big deal in the best of circumstances, but buying a house at an auction brings its own set of hurdles. There are so many unknowns when buying a home at an auction, and it’s precisely those unknowns that can make or break a deal! Flip 6 was purchased at an auction, & since then I’ve attended several more real estate auctions. But before you make your first bid on a property, be sure you’re aware of what you need to know about buyer a house at an auction!
What To Know Before Buying An Auction House
You Need “Cash” To Buy An Auction House
This is probably the most asked about part of buying a house at an auction. No, you can’t secure a secondary market loan to purchase the house at the auction. In fact, depending on which law firm or auction house is handling the auction, there are very strict rules for the cash payment. At our local auctions, some law firms will accept a proof-of-funds letter from a bank with an agreement to wire the funds within 12 hours, while others require a cashier’s check at the time of the auction. It’s important to call ahead and ask what their payment policy is for the auction.
Cash can come in various forms- for Flip 6, I secured an equity line from another property to have “cash” to purchase it at auction. Now I just have a line of credit at the bank. Others might have a savings account, bonds, investment fund, etc. As long as it can be immediately liquidated to cash, you should be able to use it to purchase a home at auction.
The House Is Bought As-Is
Whatever condition the property is in on auction day, the winner gets the home in its current condition- with all faults. If the home has mold, a bad foundation, broken windows, missing furnace or any other faults, it’s the new owner’s responsibility to repair those. At an auction, the buyer can not ask (or expect) the law firm or bank to make any repairs to the home.
The Home is Bought Site Unseen
Unlike a traditionally listed home, the buyer does not get any access to the home before they bid on it. They can not personally inspect it nor hire an inspector to professionally inspect it. This makes the process very difficult because it’s hard to gauge how much money is needed for repairs when the buyer hasn’t even seen the property! When bidding, assume worst case scenario: all appliances are broken or missing, the entire house will need paint and flooring, significant curb appeal issues will need to be addressed, etc.
The Property May Not Come With A Clean Title
If you read the fine print verbiage on the auction announcement, you may notice that the law firm or auction house does not insure clear title. In fact, it usually goes on to state that it’s the bidder’s responsibility to see if any outstanding liens exist. The only truly effective way to do this is to pay for a title search prior to even bidding. Prior to bidding on Flip 6, I hired a local title company for $200 to do a preliminary title search. Had I not won Flip 6, that would have been $200 down the drain, but since I did win Flip- it was money well spent!
My tip: I’d much rather lose $200 than lose thousands because of unknown liens.
The Home May Be Occupied
If the home is being auctioned due to foreclosure or loan default, the bank may not make any attempt to evict the owners or tenants. That legal & financial responsibility falls to the new buyer. The process of evicting tenants can be quite the task, and various investors take different approaches. You can always offer cash for keys, hire an attorney, or handle the eviction yourself. Flip 6 was vacant, so I did not have to worry about eviction. And, honestly, if I know a house is occupied, I think long & hard before I bid on it. The process to evict can be expensive and timely, especially depending on your state laws.
My tip: Prior to bidding, speak with an attorney about your state’s eviction process.
The Buyer Doesn’t Know The Property History
Not only does the bidder not get to inspect the property, they do not get a property disclosure from the previous owner. The new owner may never know if the house was previously flooded, if the home had mold, if permits were pulled for an addition, etc. Immediately after purchasing Flip 6, I hired a professional home inspector to complete an inspection. I needed to collect as much information as possible about the property. This becomes extremely important when trying to resell the property. The average buyer will be nervous when a home is sold without any disclosure at all. So as much information as you can collect and give will help!