Buying homes at real estate auctions can give you the opportunity to snag a property at a super low price, but auctions also come with a number of commonly overlooked risks. Before you start bidding against experienced auction attendees, make sure you understand the process. Here’s what you can expect.
The Price of The Property Might Exceed the Value
At an auction, you’re risking paying more for a home than it’s actually worth, and there’s no way to know the true market value of the home you’re bidding on. Because you’re bidding against other potential buyers, the price of houses in desirable neighborhoods can go up very quickly.
Homes are Sold As-Is
When a property is sold “as-is”, it means that you cannot negotiate for repairs. You make the purchase knowing that the property can have potential problems and might need to be fixed, and that’s your risk to take.
You Need Cash
An auction requires an immediate payment after you win the bid. You cannot wait to make the purchase and must have the funds available up front.
The Property May Have Liens
In many cases, auction homes are foreclosures. Since the previous property owner most likely had significant financial issues, the property might have liens on it that entitle others to the property. That’s why it’s wise for you to check for potential liens before you head to the auction.
Financing Options Are Limited
Financing for an auction is not as straightforward as it is with a traditional home purchase. Some lenders limit the amount they’re willing to offer you, or they require a larger down payment.
Homes May Have Severe Damage
In some cases, the property is damaged beyond repair at the time of purchase. Though it’s rare to walk into that circumstance, it’s not impossible. You need to go into an auction knowing it’s a gamble and prepare yourself for a potential total loss.
Having The Winning Bid Doesn’t Always Result in Ownership
Auctions often have a minimum acceptable price or a hidden reserve cost. If you bid below the minimum price and win, then you might not actually win or own the property.
You May Not Be Able to Get an Inspection
At an auction, you are not always allowed an inspection or even a chance to view the inside of the house before you bid. Always check the type of auction and make sure you understand their rules to ensure that you can look at the interior or get an inspection before finalizing the purchase.
Squatters Can Move In
Previous owners do not always move out of the property, and in some cases, others can move in before the auction starts. If a squatter moves in, it will be your responsibility to evict them.
You Might Need Extra Insurance
Since the property can have liens or second mortgages, you might want to purchase title insurance or other forms of insurance to protect against others making a claim on the property.
Some Properties are Hidden Gems
There is certainly no shortage of risks when it comes to bidding on auction properties, but in some cases, that risk can pay off big time. If you know what to look for, are well researched in the market and are prepared for any possible outcome, buying auction properties can be a great way to get a home at a price that’s going to let you collect big returns at resale.
Auctions can result in great buys, but you need to understand what you’re getting into. By going into the process with full knowledge of the potential downsides, you can protect your financial interests.