Houses sold at auction are attractive to many buyers because they can offer more home for less money. With so many foreclosures on the market, there is no shortage of auction properties to choose from and the payoff can be substantial if you find the right one. On the other hand, a person hoping to purchase a home being sold at auction should be aware of several potential pitfalls.
In some states you may not be allowed to inspect a home before it is auctioned. In others you might be allowed only a limited inspection. For example, you might be permitted to inspect only the outside of the home, or a full inspection might be permitted only on the day of the auction. While you would be happy to get a great deal on a new home, the people being evicted are probably not happy. They might destroy or damage the inside of the home, and no inspection or a limited inspection would prevent you from detecting the problem. Unintentional damage from neglect due to financial hardships could also be hidden.
In many cases, the buyer of a house being auctioned is responsible for covering the attorney fees, property taxes owed, back interest and auction service fees at the time of purchase. For example, if your winning bid on a home is $200,000, you may think that's all you've got to pay at the end of the day. When it comes time to settle up however, you may find that the homeowner owed $20,000 in property taxes, the attorneys have billed $10,000 for the foreclosure, the auction service has a 2 percent fee and there is $15,000 in back interest on the loan amount. Your $200,000 price tag is now $249,000 and you must pay it all in cash before the house is yours. Rarely if ever are all of these charges made clear up front at auction, and the pitfall of getting stuck paying more than you thought for a property is a real one.
Some buyers at auction are unaware of the potential for unpaid liens and existing mortgages, both of which must be satisfied before you can take possession of the property. They can get stuck with a property on which a large sum of money is still owed. These lien-holders are entitled to collect their money first -- before the seller -- meaning you may end up out the difference. Always have a title search performed before buying any property at auction -- or otherwise -- to be sure of what you are getting into.
Some auction property buyers attempt to avoid all the pitfalls associated with the process by purchasing several types of insurance to protect against risk. Title insurance is meant to cover any undisclosed liens against the property, but it does not cover federal tax or child support judgments. Auction property warranties are meant to cover anything that might be wrong with the house so that the risk of limited inspection is not so great. In reality, warranties do not cover roof damage, outside structural damage, faulty appliances or water damage, leaving you with a large bill anyway. In the end, these insurance policies can themselves be pitfalls as buyers believe they are protected from extra expense only to find that they are not.
Low Market Value
Securing a mortgage for your purchase may require more work than a more traditional purchase. Foreclosed properties are typically appraised for less than their market value, and lenders offer less of a loan as a result. If your loan approval amount is too low, you may find yourself short at the time of sale. You may have to work with your lender to obtain the highest loan amount possible and eliminate the chance that you won't be able to make the deal.
- Bankrate.com: How to Buy Foreclosures at an Auction
- MSN Real Estate: 12 Tips for Buying Foreclosures at an Auction
- Bankrate.com: Hassles of Buying Foreclosures at Auction
- USA Today: Buying Homes in Foreclosure Can Be Risky
- Realtor: How to Buy a House at Auction
- TIME: Want to Buy a Foreclosure? Here’s What You Need to Know
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.