How Real Estate Auctions Work

House auctions typically involve the sale of foreclosed houses below market value. They can serve as a low-cost gateway to homeownership but home auctions also involve plenty of risks. Most of the time, you won’t actually get to step inside the home before bidding on it. You also may be hit with hidden auction fees that could throw off your budget. It’s important to understand how real estate auctions work, where to find them and what you need to know before putting in a bid. But in this blog, we’re going to tackle how it works and its risks. 

How Home Auctions Work

When a homeowner misses several months of mortgage payments, the bank or other lender can place the property under foreclosure and move to get the tenants evicted. It then places the home in a foreclosure auction, which is held by bank-hired trustees. The lender hopes to recoup what is still owed on the mortgage but often gets less. It isn’t allowed to get more or profit from the auction.

In other cases, a homeowner can fail to pay property taxes for many years. So local tax authorities take control of the property and place it in a tax lien auction (a tax lien is a lien imposed upon a property by law in order to secure the payment of taxes). These are held by governmental authorities.

Each of these can break down into two other types of auctions. In a confirmation auction, the lender has the choice to accept or decline the sale if the bid is too low. In an absolute auction, the highest bidder wins the property.

Risks to House Auction

In many cases, house auctioneers won’t allow you to inspect a home before you bid on it. It’s for sale as is. So if you win the bid, you’re stuck with the property regardless of its condition.

Remember why these homes were foreclosed on in the first place. If the homeowners skipped their mortgage payments and/or property taxes, they probably neglected basic maintenance expenses as well. In some cases, they may have even intentionally done damage when they knew they were losing the property. You’ll be on the hook for the cost of all those repairs when you get the house.

And even if you can tour a home before the auction, you can only see so much. Unless you’re a skilled contractor or home appraiser, you may not know what to really look for. There could be severe problems behind the walls or under the floors. Again, you’ll have to shell out more money to cater to these issues. And if utilities aren’t running, you won’t detect any of the leaks, faulty electrical systems, and other hazards.

You may even be responsible for expenses that don’t have anything to do with the home’s structure. The property may have claims or liens against it from any number of creditors. That burden shifts to you along with the keys to your new house. Of course, these are only worst-case scenarios that you should be aware of, but it’s not always like this. There’s still a higher chance of you winning big on a foreclosure auction.