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What Are Property Auctions? The Pros and Cons

For sellers, a property auction is one way to make a quick sale, and for buyers, auctions serve as an alternative method to finding a home in a tight market. If you’re looking to purchase a home, it’s important to understand the differences between an auction and a traditional real estate purchase. Here’s what you need to know, plus the pros and cons of buying a home at auction.

Auction Procedures

Like the rest of the real estate industry, a lot of the marketing for property auctions has moved online. After reviewing the available properties, a bidder should read all the terms associated with the auction for the specific property they plan to bid on. Generally, bidders must register in advance and submit proof of identity, and to ensure that bidders are serious, some auction companies require an upfront deposit in the form of a hold on your credit card or a cashier’s check. If you don’t win the auction, the check won’t be cashed and the hold will be released.

Additional financial information, including bank statements or proof of available lines of credit may also be requested as further assurance that the highest bidder has the ability to complete the purchase. Once the auction begins, a set time is allowed for the submission of bids. At the end of the bidding period, the property will be sold to the highest bidder who’s able to bring cash to the table.

Pros to Buying a Home at Auction

  • Potential Price Break
    Due to the nature of the bid process, auction homes have the potential to be sold at a discount. In particular, properties offered on an absolute basis, without a minimum sales price (also known as a reserve price), provide the best price opportunities. Auctions also limit price competition to a defined bidding period with a stated end date. This reduces the possibility of sellers leaving properties on the market and waiting for better offers or changes in the market that may increase the price of the home. To determine how much you’re willing to pay at an auction, research current price trends in the vicinity of the home you plan to bid on.
  • Access to Desirable Properties
    Auctions may be used to stimulate interest in new developments such as a new high rise condominium building. In these cases, bidders have the opportunity to purchase desirable properties that are expected to rise significantly in value. Some homes are also auctioned off if they fall into foreclosure. In these cases, buyers may gain an increased opportunity to bid on homes they may not otherwise be able to afford.
  • Quick Settlement
    Buying at auction tends to lead to a fast settlement. Predefined terms have been set by the seller and the auction company, which leaves little room for negotiation after the highest bid is announced. Generally, only a short time frame is permitted between the auction and settlement.

Cons to Buying a Home at Auction

  • Cash Financing
    Many auctions are cash sales, and the buyer must have funds available and be ready to proceed to settlement. However, this “con” can also work to a buyer’s advantage, as the cash requirement decreases the number of qualified bidders. Most homebuyers need a mortgage or other financing to complete a purchase. Thus, competition for auction properties is limited to those who are able to buy a home outright.
  • Limited Opportunities for Inspection
    Often, auction homes are sold “as is.” While you may be able to inspect or preview a home during a preauction open house, that isn’t always the case. As a result, if you purchase a home through an auction, you should have additional funds for repairs and renovations.
  • Title Issues
    Auction homes may have title issues. Typically, the auction company will disclose whether or not they are guaranteeing the title. For distressed properties in particular, auction companies may not guarantee a clear title. This leaves the new owner of the home responsible for paying outstanding tax liens and unpaid utility invoices. To give you an idea of potential title issues, you can pay a title agent to run a title search before you bid on a property. The cost of this title search will not be refunded if you’re outbid, but the information you receive can help you decide on a price cap.

Before you commit to purchasing a home through a property auction, make sure that you thoroughly understand the process, and the pros and cons that come with it. If you decide that it’s the right homebuying solution for you, read the auction terms thoroughly prior to bidding, and make sure you have the proper financing lined up in order to increase your chance of a successful bid. There are a number of Internet sites where you can learn more about property auctions and make your bid today. And if you choose to go the traditional route, visit Owners.com to see the latest listings.


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