Is Buying a House at a Real Estate Auction Wise?
When you are planning on buying a house, you want the best deal you can get.
It’s human nature — and financially savvy — to look for bargains wherever you can find them. And when it comes to buying a house, a price that’s even a few thousand dollars below market value can make a big difference.
Our clients often ask about real estate auctions, and whether they might find a good house that’s a bargain. But buying anything at auction, from cars to real estate, poses some risks along with the potential benefits.
Understanding the Types of Real Estate Auctions
In the wake of the real estate crisis of the last decade, many homeowners lost their houses in foreclosure. These homes are typically sold in an auction, literally on the courthouse steps.
This practice gives rise to the belief that every real estate auction is a distress sale. However, auction has become a popular means of selling a home that is not in distress.
For centuries, the auction platform has been the preferred method of selling fine art, cars and antiques. Home sellers have come to realize that this platform offers some benefits for real estate as well. Consequently, perfectly fine homes are now sold at auction on a regular basis.
So does that approach offer any benefits to the home buyer?
Is Buying a House at Real Estate Auction Less Expensive?
Auction as a sales method is popular because it preys on human psychology. Many of us, when placed in a room with others who want the same thing we do, become competitive. Auctions move quickly, and most auctioneers use a chant that’s difficult to understand.
As a result, buyers may get into a bidding war with the price rising beyond their comfort level before they even realize it.
To bid at auction, you must provide a deposit (usually a sizeable one) to participate. If you’re the high bidder, your deposit becomes instantly nonrefundable. So, even if you have bidder’s remorse after the fact, you must close on the property or forfeit your deposit.
Then there’s a little thing called a buyer’s premium that adds to your bid price. The auction house will add a percentage to your bid (typically 10 percent), because that’s how they get paid.
So if you already bid the price up to market value, the buyer’s premium will take you above retail price.
You Have No Way Out When Buying a House at Auction
Once the auction ends, you will have 24 hours to place an additional sum of money in escrow, typically an amount equal to 10 percent of the total purchase price (your bid + buyer’s premium). That also becomes nonrefundable.
When buying a house at auction, you have no inspection period, no financing contingency and no right to request repairs. Homes are sold “as-is, where-is.” So, even if you discover the structure is falling down, you’re on the hook.
Mind you, we’ve just given you all the bad news. You can sometimes find great deals at a real estate auction. You just never know when. You’ll have to spend some time prior to auction day on due diligence, but most auction houses will allow you to perform a home inspection ahead of time.
Finally, reputable real estate auction companies will foot the bill for the buyer’s agent. Since it’s not going to cost you anything, you have no reason not to engage the services of a local Realtor®. This is especially important if you aren’t familiar with the auction process.
In Yorba Linda, the Edie Israel Team knows real estate. We will work closely with you to find the home of your dreams and help you through every step of the process. Contact us today for more information if you’re interested in buying a home in Southern California.