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Whether you’re an investor or a homebuyer, purchasing a house from an auction can be an enticing prospect. After all, most of them start the bidding well below market price, so there’s a chance you could get a huge bargain, right? Well, in order to increase those chances, you must first fully understand what a home auction is. So, how do home auctions work?
How Do Home Auctions Work?
A home auction is exactly what it sounds like. At this event, interested buyers gather to bid on houses, possibly at a reduced price. While you may have the chance to buy many types of properties at such an auction, most are foreclosures. In these cases, the previous homeowner missed too many payments and the bank evicted them, reclaiming the property in the process.
The bank or lender then has the option to place it in an auction in hopes of recouping some of that money. If they put the house in a confirmation home auction, the lender has the final say in whether or not they accept the bid. In cases where the offer was too low, they may not. However, if they place it in an absolute auction, the property must go to the highest bidder.
How Risky Is It?
Since most of the properties at home auctions are foreclosures, there is a certain amount of risk involved in bidding on and purchasing one. Often, you won’t be able to tour the home before buying, so you’ll have no clue what you’re getting. You could certainly get lucky and end up with a home that’s in excellent condition, well below market prices. However, the odds of that happening aren’t in your favor.
Here are a few risks commonly associated with purchasing a home at an auction.
1. Lack of Disclosure
Since the previous owner isn’t involved in selling the home and no one from the bank has ever been there, you’re unlikely to find much information about it. Consequently, neither them nor you will know if there are any existing problems before purchasing the property — and chances are there will be. This general lack of disclosure and knowledge about the home’s interior conditions can be cause for concern.
2. Repair Costs
Moreover, if the bank evicted the home’s previous owner, they may have retaliated by stripping and destroying it before moving out. Often, they’ll remove appliances, fixtures and anything of value. However, they might also actively vandalize the house, even after vacating. Of course, if you purchase a residence in poor condition like this, you’ll be left with several major repairs, which may cost even more than the home itself.
Vandalism isn’t the only thing you’ll have to worry about. If the home has been sitting empty for some time, squatters may be camping out inside. In some cases, the former owner is squatting on the property, and you’ll have to either work out a deal with them or formally evict them. This process can take months or years depending on who the squatter is and what state the home is in.
4. Additional Fees
After you pay in cash at the auction, there are still several additional fees you may have to pay. This might include taking on any bills the previous owner left unpaid, including gas, water, electric and property taxes. You’ll also be responsible for closing costs to process a mortgage, transfer ownership and fulfill other legal requirements. These fees may cost up to 5% of the sale price, depending on location.
Is Investing in an Auction Home Worth it?
Buying a home at an auction isn’t for the faint of heart. From squatters to remodels, there are many things to worry about and pay for even after purchasing the house. However, if you know the risks going into the auction, you’ll be more prepared if things go wrong and you get stuck with something that needs some work. As long as you’re willing to put in the time and money, the investment may be worth it.
On the other hand, if you aren’t willing to risk investing in a house that may or may not be worth the hassle, home auctions might not be your cup of tea. You may feel more comfortable paying more for a home you know will be worth it.