Real Estate Auctions Provide Options in Low Inventory Market

With national housing inventory remaining at stubborn lows, buyers are turning to other ways to score their dream home.

Rather than waiting to pounce on the next best thing to come on the multiple listing service (MLS), real estate auctions can provide a back-door solution to frustrated homebuyers.

"Auctions are becoming more and more popular, especially after eBay became a mainstream tool," says Thomas W. Saturley, president of Tranzon Auction Properties. "During the recession, auctions were primarily driven by distressed properties such as foreclosures and bankruptcies. However, today the industry has evolved into something both buyers and sellers can consider as a way to move property in a swift manner."

One distinct benefit of purchasing a home on auction is a significantly reduced purchase price. "Not all homes for sale through conventional means are affordable to the average buyer," says Steve Udelson, president of online auction site Hubzu. "Buyers are turning to alternative sources like bank owned homes and homes through auction that are less expensive but still provide tremendous value."

Another benefit, which also be a hurdle of auctions, is the ability to get a property sold quickly; that, of course, can take some buyers off guard. "The quickness can be very intimidating, especially for someone purchasing their first home," Saturley says. "However, if the buyer works through a reputable firm and does his or her homework, the process isn't all that different from conventional home buying."

To get the best deal, homebuyers should check all available sources during their search, especially when the MLS shows the same properties week after week. "Add in an auction site like Hubzu to your search or sign up for email alerts so you know when a new property is available," Udelson recommends.

Different Types of Auctions

While it's good advice to include auction properties to your search, buyers should know not all home auctions are the same, says Steve Jolly, broker at Benchmark Realty, LLC.

"There are many different kinds of auctions, and they each have their own rules so it is imperative that you understand what kind of auction you are attending and what rules are in place," he says. "The rules and any information provided are usually advertised with the auction, so it is important that you read and understand all of the info presented." Also, the real estate and foreclosure laws differ from state to state, so it is best if you take time to learn the rules of the road in your area, Jolly adds.

Foreclosure auctions:  

This occurs when a bank attempts to sell your home to a third party to rectify your default in making mortgage payments.  Often these auctions occur in a public place like the steps of the courthouse and usually buyers do not get to see the interior of the home prior to the auction. If they are sold occupied, the buyer is typically responsible for the eviction.  Depending on your state, there may be a redemption period, where the buyer can pay off the debt and redeem ownership after the auction.  If the highest bid does not meet the reserve, the property will be sold to the bank and become bank-owned (or REO).

Tax auction:  

When owners don't pay property taxes on the home, the government attempts to sell your home to a third party. This is another instance where the buyer is not able to see the interior of the home prior to the auction.  If the home is sold occupied, the buyer is typically responsible for the eviction.  Depending on your state, there may be a redemption period, where the buyer can pay off the debt and redeem ownership after the auction.

Post-Foreclosure auction:  

When the home does not sell at the foreclosure auction, it reverts back to the bank and becomes "bank-owned or REO."  These auctions can happen online, at the home or in another location. Buyers will often have the opportunity to view the inside of the home prior to the auction and are usually sold un-occupied. However, if they are sold occupied, the buyer is typically responsible for the eviction. Depending on your state, there may be a redemption period, where the buyer can pay off the debt and redeem ownership after the auction. If the highest bid does not meet the reserve, the property may not sell at the auction.

Traditional auction:  

Traditional auctions are homes sold by the homeowner.  Typically these will transfer with clean title, no redemption period and the ability to view or inspect the home prior to the auction. They may be sold with a reserve price, and if not met there is no sale. The traditional auction is an absolute auction, there is no reserve and the home sells to the highest bidder regardless of the price. These auctions typically happen onsite.

Making an Auction Property Purchase Work for You

Each auction scenario is unique, which means as a buyer, you should shore up as many resources as possible to make the auction work to your advantage.

"I recommend that the home is inspected to the highest degree possible considering the situation," Jolly says. "Even if that means that you can only take your contractor on a quick tour of the home.  The more information that you have, the better decision that you will make.  Due to their complexity, auctions are not a good match for first time and inexperienced home owners."  Saturley adds that buyers should bring any professional to the home that will solidify their decision whether or not to make a bid.

With a foreclosure and tax auction, it is a good idea to have a title search conducted just before the auction, Jolly adds. "These properties are often sold with all faults and defects in the title," Jolly adds. " So, these may have liens or other issues that need to be cleared after the sale.  You don't want to buy a home and then late find out you have to pay thousands to clear the title."

Seek out a real estate agent who specializes or has experience with auction properties. "Also, if this is your first time purchasing a home through an auction, especially if this is your first time purchasing a home, to do a dry run," Saturley suggests. "Attend a few auctions just to get a feel for what goes on before you consider making a bid or buying."

Also, have your financing in order prior to moving forward. "Buyers should make sure financing is accomplished ahead of time," Saturley says. He adds buyers need to be ready to move quickly if they plan to bid on a property.

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