Home Auctions

How Do Property Auctions Work?

By August 23, 2020No Comments

Becoming a homeowner can be expensive, but there are a few ways to make the process a little more economical. Believe it or not, there are ways to find houses for 50% off!

Buying a house at auction can be risky, but it is one of the ways to strike a great deal and become a homeowner. Sometimes the benefits of buying a house at auction outweigh the risks. 

But what exactly are house auctions, and how do house auctions work? Read on for answers to these questions and more. 

What Is Foreclosure?

Foreclosure on a house happens when a homeowner fails to pay what they owe, and the lending entity takes ownership of the house to sell it and earn back the money owed to them. 

There are a couple of common ways that foreclosures happen. The bank or other lending entity can take ownership of the house if the homeowner fails to pay their mortgage, or similarly, the government can take over if the homeowner fails to pay property taxes.

How Do House Auctions Work?

How do house auctions work, you ask? The concept is relatively simple. 

Homes are generally auctioned following foreclosure as a way for the lender or government to earn back some of the money they have lost. Because the goal is to recuperate this cash, the starting prices for auctioned houses are usually well below market value. 

These low prices tend to attract a lot of bidders. The more bidders, the more bids, so this process often drives the price up. Despite the price change that bidding invokes, however, the final price of houses at auction still tend to remain below market value. 

There are a few types of auctions:

Absolute Auction

This means that the seller will award the house to the person who bids the highest number regardless of what that amount is. 

Minimum Bid Auction

This is when the seller determines a minimum price for the house and will not accept bids that are lower than that established number.

Reserve Auction

This gives the seller more autonomy than absolute and minimum bid auctions because the seller can accept or reject offers regardless of the amounts. 

Are There Risks When a Home Is Auctioned?

In general, houses at auctions are indeed risky investments. Oftentimes, however, the potential benefit of becoming a homeowner for a low price outweighs the potential risks. 

Auctioned homes are usually bought sight unseen, so the general processes involved in purchasing a home, such as the home inspection, often don’t take place. There are a few ways to get some necessary information on the house before committing to it.

  • If you can, walk or drive by the property to see if it’s in good shape from the outside
  • Consult a real estate attorney who will be able to advise you on the safest way to proceed with an auctioned house and the finances involved
  • Check the estimated value of the house and how much is owed on the mortgage
  • Check if there are liens against the property because you, as the new owner, could become responsible for them once the auction closes 

The House Auction Summarized

So, how do house auctions work? Simply put, they work the same way that any other auction works; a bidder bids a sum of money, and the most desirable number or highest bid wins the prize, which, in this case, is a new home. 

If you have further questions or are interested in purchasing a home, we can help! Don’t hesitate to contact us.