How Do Auctions Work?

There are a variety of different auction houses, and every one of them has their own rules. Even within one auction house, there may be a variety of auctions being offered. They must also conform to the rules of the state and municipalities in which they are located. Make sure you understand the rules of the specific auction you’re interested in before you bid.

Types Of Auctions

Auctions, whether in person or online, will be organized in one of three ways, and any single auction may deploy one or all of these types, depending on the property owner’s preference.

Absolute Auction

In an absolute auction, the highest bidder wins, regardless of the amount of the bid. You might bid $1 and win a house.

Absolute auctions attract the most bidders because there is no minimum. This is also the preferred method of most lenders and government agencies. All sales are final, meaning there is no room for the seller to back out in the face of a too-low bid.

Minimum Bid Auction

In this type of auction, there is a minimum bid amount on a property. The minimum bid is published in advance, and if you’re bidding in person (more on that below), the auctioneer will announce the minimum bid amount before opening bidding on the property. The minimum bid is generally the balance owed on the mortgage in the case of foreclosure, or taxes owed in the case of a tax lien. All sales at the minimum bid or higher are final.

Reserve Auction

In a reserve auction, bids are treated more like offers in that the seller can accept or reject the bid (but not counteroffer, as they may in the typical real estate transaction.) In these cases, the seller usually has a minimum bid in mind, but doesn’t want to share the amount, in the hopes they’ll get more at auction. If you’re bid is lower than the minimum amount the seller is looking for, they may simply reject the offer.

Types Of Bids:

Sellers choose the bidding arrangements they want to try and increase the sale price.

Open

In an open auction, bidders know the amount of any other bids that have been made. Bidders like open bids, because they can see what the competition is doing and raise their bid gradually, as needed. If there is no competition, a lowball bid might just win. On the other hand, open bidding can result in bidding wars, and sometimes sellers reap a windfall.

Blind

Sellers generally prefer blind bids, even if it reduces competition. This process is more like bidding on a job. You’ll have to make a bid without knowing how others are bidding. Motivated buyers need to make a bold bid upfront instead of taking a wait-and-see approach.

If you’re an investor, you’ll have a good sense of how much to bid; if you’re looking to buy a home for your family, you might overbid because you lack experience or are too swayed by emotion.

In Person Or Online?

The world of auctions is rich and vast, and if you’ve never been to one,

you should check one out in your area, in person.

In Person

Attending an in-person auction can feel like taking a step back in time. It might take place right outside on the courthouse steps. There are the numbered cards, lifted almost imperceptibly and yet always seen and noted by the fast-talking auctioneer. The bidders wear sunglasses and hats, like high-stakes poker players, to hide any “tells” that might convey emotional responses.

If you’re a first-time auction attendee, you might not have a clue about what’s going on. Your best bet is to start attending auctions well before you plan to bid. Collect any sales materials being offered and read up on the rules. Much of this information can also be found on the auctioneer’s website. Get to auctions early or plan to stay after and ask questions of some of the auction house’s employees or other bidders. Pretty soon, you’ll develop an understanding and a feel for the process.

Online

More and more frequently, the auction process is moving online.

This is a boon to first-time bidders, as it is easier to get all the information you need, ask questions, and simply watch and learn. Make sure you study the rules, as each auction site operates according to its own procedures. On most real estate auction websites, you’ll have to preregister and prove that you are a serious, prequalified bidder, so leave time to complete that process well before the house you’re eyeing comes up for bid.

Of course, this increased accessibility means that there will be more bidders, so be prepared to face steeper competition.

What Are The Advantages Of Buying A House At Auction?

There have been countless books written and real estate workshops offered that extol the virtues of buying

properties through the auction process, because it is possible to get a tremendous bargain.

Why? Because in the auction process, the lender is looking to cut their losses by recouping the balance due on the mortgage and their costs to foreclose. At auction, lenders are not interested in enriching the seller. The same is true for municipalities with a tax lien in place. Their interest is in coming as close as possible to having the tax bill paid and their costs recouped.

What Are The Disadvantages Of Buying A House At Auction?

There are several reasons why buying a house at auction is usually in the real estate investor’s wheelhouse and is an atypical way

of buying a home to live in yourself. The reason the house is a bargain is because the buyer is taking on a lot of risk.

Houses Are Sold As Is

Homes at auction are sold as-is. That’s not so unusual, as many government-held foreclosures are sold in the same way. However, in most cases, it is highly unlikely that you will be able to even get inside a home sold at auction, let alone get a home inspection. It’s possible that the house is still home to the defaulting homeowners, tenants, or squatters who have taken up residence there. In this case, “as-is” is closer to “sight unseen.”

You can drive by a house, but trespassing on the property, much less looking in the windows or entering the home, is illegal and unsafe – even if you did see them do it on a house-flipping reality TV show. If you are very experienced in-home improvement matters, you might be able to get clues to the condition of the property from the street or sidewalk. If you’re not, you’ll have no clear idea what you’re taking on when you bid on a home.

You Must Have Cash To Make The Purchase

Most auctions have very strict rules about how you can pay for your purchase, and they almost always involve cashier’s checks or cash. You can’t finance auctioned properties. There are loans available, and we will discuss them later, but in order to bid, you’ll have to prequalify by showing that you have cash available to complete the purchase, often on the same day as the auction. 

That’s why most purchasers of auctioned-off properties are real estate investors. They generally have the financial backing of investors, or they have set up their businesses to allow for high cash reserves.

You’ll Forego Common Protections

In the vast majority of real estate transactions, home buyers are legally offered consumer protections, lenders are required to make disclosures, and real estate agents must advise you as they would advise themselves. In the auction situation, none of that applies.

In addition to having little or no access to the home you wish to buy before you bid, you are responsible for doing your due diligence to make sure the title is held free and clear. Of course, the mortgage lender, and probably the taxing authority, have liens in place, but you have to make sure there are no other liens, as in the case of a home equity loan in default or unpaid homeowners’ association fees. If there are, you will be responsible for paying those liens off when you acquire the title to the property.

After You Win At Auction, The Property Could Revert To The Previous Owners

Even if you win at auction, you can still lose the house. If the owner is suddenly able to bring their mortgage current, work out a forbearance plan with the lender, or negotiate a short sale, you will walk away empty handed. Until you receive the title with your name on it, which usually takes about 10 days after the auction ends, you have no guarantees.