It’s one thing to bid on an iPhone on eBay, but what if your dream home was up for auction?
Other than the way price is determined, purchasing a home through auction is not much different than other residential real estate transactions.
“An auction is a means to get to a purchase price,” says Rick Levin, president of Rick Levin & Associates, Inc. “The rest of the transaction is very, very similar to the way conventional real estate is transacted in the Chicago area.”
Interested in buying at auction? Here are the steps to expect:
Finding a home
Learning about homes for auction has gotten easier in the last few years since auction homes were added to the Multiple Listing Service.
Another way is to look for signs in yards. Just like with other homes for sale, homes for auction often have a sign in the yard, explains Michael Fine, principal managing broker of Fine and Co., a national real estate auction and advisory service, and past trustee of the education arm of the National Auctioneers Association (NAA).
Another route is to visit the NAA site at auctioneers.org to find auctioneers in the area where you are interested in purchasing a home.
Levin suggests visiting auctioneers’ websites for a list of properties for auction and signing up for email alerts for new properties. Buyers can also check traditional real estate listings in newspapers and niche publications to learn of auction properties.
Check it out
If you’ve found a home that interests you, the next step is to attend an open house event to get a good look around the home. At the event a “due diligence” packet is typically offered including reports from the home such as an appraisal, a copy of the real estate contract and the timeline for bidding and closing.
“The buyer is more knowledgeable and more comfortable,” Fine says. “When a buyer evaluates the home they already have all the information in front of them.”
It isn’t required for the buyer to have a representative though they may already be working with a real estate broker.
Levin says many auctioneers are also members of the National Association of Realtors.
If the prospective buyer is interested in bidding many auctioneers encourage the buyer to have an attorney.
“I’m still a big fan of using an attorney. The cost is reasonable to make sure all the t’s are crossed and the i’s dotted,” Levin says.
An attorney also can make sure all the details and costs are understood. Potential bidders should be aware of any buyer’s premium where they are charged the commission rather than the seller. A buyer should always find out if there are other fees that will be added to the final bid. Fine likens it to buying a car. You don’t pay the sticker price because taxes and fees are associated with the purchase.
While often the seller will have a home inspection done as part of the due diligence, Levin says buyers still have the option of bringing in their own inspector to look over the home. If the buyer’s inspector finds something that needs repairing or updating there is no haggling or asking for credits, the buyer simply adjusts their bid amount based on the estimated work they think needs to be done.
Let’s make a deal
While some homes are sold at a live auction or through sealed bids, most are done online. Participation in an auction requires pre-authorization with the auctioneer and a valid credit card to verify the bidder. Once entering the auction, a bidder is typically asked to click the mouse to agree to the terms of the contract in the event they are the highest bidder. An online auction usually takes place over a week so a buyer will go in with their lowest bid and can work up from there. Except for the last minutes of the auction, the bidder has time to think about whether or not they would like to go higher. Buyers benefit because they get to see what other buyers are willing to pay, Fine says, adding it is helpful to go into the bidding process knowing the highest you are willing to go.
The highest bidder then has about 24 hours to submit a signed contract and 5 percent earnest money to the auctioneer. The buyer will have about a month and a half until the closing to bring the contract to a lender and secure financing for the home.
A closing date is set ahead of time and, just like other home real estate transactions, the remainder of the money is exchanged, liens are transferred and keys are handed over.