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What You Should Know Before Buying At A Real Estate Auction

An ostensibly good property deal at an auction can be alluring. If the home is a foreclosure, it’s an obvious gamble, but sometimes the low cost can be extremely tempting. Alternatively, many sellers are choosing to go the auction route for an accelerated home sale process. It’s a strategy that more agents are considering offering to home sellers.

If you’re not adequately prepared as a buyer, however, you can be stuck with a crumbling home wrapped up in red tape and the investment turns into a sunk cost. Here’s what you need to know before purchasing a home at a property auction.
Consider working with an agent

Katie Steinfeld, the broker of record at On The Block Realty, outlined the advantages of working with a real estate as a buyer looking to purchase at auction.

“You have no advantage to not having an agent,” Steinfeld said. “Having somebody there to really interpret the comparables and really give you a good sense of the market and how you should be bidding.”

An agent can also interpret the terms and conditions of that specific auction house, which can further prepare the buyer.

Laura Brady, the CEO of Concierge Auctions, a luxury property auction platform, noted that it’s important to make sure the auction company knows you’re represented by an agent when you register.

“If your registration is received without your agent’s name included, then they might not be eligible for compensation,” Brady said.

Familiarize yourself with the auction company…

Every auction is different, so it’s important to familiarize yourself with the terms and conditions of the specific auction and do your due diligence on the specifics of that auction, according to Brady. As Steinfeld mentioned, this is an area where having an agent can be beneficial.

“The [terms and conditions] should include the steps to register for bidding, preview and inspection opportunities, agent commission offered, and other rules of the auction,” Brady said. “They should also reference the draft purchase and sale agreement that is associated with the auction, which will likely not allow negotiation of the terms, as well as the diligence materials offered.”

Some auctions even offer incentives for early registration or registering with an opening bid – something a buyer can take advantage of if they’re aware ahead of time. Buyers can also reach out to the auction firm ahead of time to know what to expect.

“If the sale will be conducted digitally, then be sure you’re comfortable with the user experience, how to place your bids, and how to notify an auction representative if you need help,” Brady said. “For most digital auctions, you also have the opportunity to be on a phone line with a bid assistant at your request.”

“If the sale will be conducted live, be sure you know where to arrive for bidding and when,” Brady added. “You might want to visit the location earlier in the day, so you’re comfortable with the environment.”
Get your finances in order

It’s essential to get pre-approved and make sure your financing is in place, so that, if you are the highest bidder, according to Steinfeld, you can actually afford the home you just won. It’s especially important to know what sort of fees will come on top of the purchase price, before getting pre-approval.

“Some auction houses do charge a buyer premium so that is something that you have to keep in mind or ask about if you’re participating in an auction,” Steinfeld said. “The buyer premium can range – it’s usually a few percentage points on top of the purchase price of the home, which can add a lot to your price. You want to make sure you’re aware of those costs ahead of time.”

To register for bidding, you will likely have to place a bidder deposit in escrow, according to Brady, which will be returned if you are not the high bidder.

“Submit a signed agreement of the terms and conditions, and perhaps a bank letter and/or discussion between the auction firm and your bank representation,” Brady said.

Make sure the auction house is reputable…

Travis Britsch, the vice president of specialty operations at online auction site Hubzu , mentioned that there are a few things buyers should look for in an auction to verify that it’s a reputable site. He said to first make sure its a site with a large number of listings and auctions because that will demonstrate it’s a well-established operation.

“Ensure that you are working with an auction site that is transparent,” Britsch said. “Check if they provide a full bidding history with bid amounts for each bidder. This allows you to understand how many bidders are interested in the property and to assess how competitive the auction is.”

Britsch also said to make sure that the auction site qualifies buyers through ID verification or bid deposit, so you know you’re bidding against a real person and bidding teams aren’t manipulating the auction to their advantage.

“It is also helpful to use an auction site that provides bidders with multiple channels to participate in the auction such as website, mobile application and SMS notifications,” Britsch added. “This allows bidders to respond to bid situations quickly and easily from wherever they are.”

If possible, drive by the property but do not trespass… put together a helpful guide for first-time auction buyers and included the advice of driving by the property, but warned buyers not to trespass or disturb the occupant if the home is occupied.

“There’s a saying among investors that’s a pretty good rule of thumb: ‘How it looks on the outside is what it’s going to look like on the inside,’” the guide says. “In other words, an unkempt exterior indicates an unkempt interior, while a home with great curb appeal will probably look similar inside.”

If the property isn’t a foreclosure and represented by the agent, there’s a chance that the auction company will offer a pre-list home inspection, so you know what the condition looks like. If the auction company isn’t offering it, there’s still a chance they’ll allow the buyer to do their inspection.

If there’s no opportunity to check out the home before the auction, you should still have your inspection plan in place immediately following the auction, according to Brady.

“Most auctions do not allow post-auction contingencies, which means your inspection, financing, and any other due diligence must be finalized prior to the opening of the auction,” Brady said. “The opportunities for inspection range from a couple of weekend days to every day heading up to the auction – depending on the auction firm.”