Property auctions are popular ways for both investors and potential homeowners to score a deal on a new home. But the nuance that goes into an auction sale is more complex than you might think. Successful auction bidding requires discipline and an understanding of the fees that might end up inflating your final cost. So what fees will you need to pay when buying a house at auction?
The types of fees you’ll have to pay depend on the type of auction. Public auctions are the most straightforward as they have no fees. Private auctions, however, are more complicated as the number of fees depends on what the auction company sets. Private auction houses can charge any amount of fees or premiums they want, but these will always be disclosed before bidding.
So is it worth it to try your luck at a property auction? Let’s break down what a property auction is, what to expect, and how to make sure you don’t end up underwater because of auction fees.
What is a Property Auction?
Property auctions can be for any sort of property available, including commercial, residential, and industrial. Most often, these are properties that have been foreclosed on, and the bank is looking to recoup its investment.
There aren’t many rules that come with how an auction is run or where it must be located. Many states require that the auction be held in a public space, so you’ll typically find auctions in front of a courthouse.
Whoever ends up with the highest bid wins the auction and becomes the property owner (assuming they complete the transaction). The majority of auctions require cash within a short amount of time and a hefty down payment, usually around $5,000 – $10,000.
Previously, auctions were always in-person, but thanks to the availability of high-speed internet around the country (and COVID), many auction houses have begun to utilize online sales.
Some auction houses will allow for an extended period of bidding over multiple days, but these are rare for large properties. Most often, you’ll need to show up at an exact time to a participant.
What are the Different Types of Property Auctions?
Not only are auctions running as in-person and online events, but there are also different categories of property auctions. It’s especially important to learn which type of auction you’ll be participating in, as it could potentially mean thousands of dollars added onto your final price.
Public auctions are run as an event during the foreclosure process. Banks will use auctions to either get the property back under their portfolio or liquidate it to the highest bidder.
These, in my opinion, are the auctions that work out best for investors as they have no additional fees; what you bid is what you pay. However, there are some strict requirements you will need to be aware of:
- Most auctions require the winner to pay in full within 24 hours of winning.
- You will be required to pay a non-refundable deposit that runs anywhere from $5,000 – $10,000 or more.
- You will not have the ability to get title insurance
- You will not have access to the inside of the home
- The property is sold as-is
The reason for so many restrictions is that the bank running the auction does not own the property. Consequently, they cannot tell you whether you’re buying a 1st, 2nd, or 3rd position on the home, and they have no legal authority to let you inside the structure.
If you decide to go with a public auction, be sure you’ll be able to get hazard insurance since you cannot get title insurance and do your due diligence to ensure you’re buying the 1st position on a property.
Private auctions are run a little differently than public auctions. Banks or bank representatives often run these. Quite often, they’ll bundle several properties together for an auction but will auction them off individually.
The good news is that, unlike public auctions, you’ll have the ability to get title insurance. The bad news is that, unlike public auctions, it’s pretty much the Wild West when it comes to rules and fees. There may be bidding fees (or “premiums”) or agency fees, though these are rare. There may be other extraneous fees; it’s dependent on the auction company to set their own rules.
Though not exactly live auctions, wholesalers can sometimes operate on an auction-style basis. Most often, you’ll see offers that say something like, “Starting price for this property is $185,000. Give us your best offer.” The wholesaler will then choose the highest bidder from the bids received. This can be murky as they may accept bids over a certain period rather than a live auction time. Since they’re not operating in a “classical” auction sense, different fees are associated with purchasing from a wholesaler. Check our wholesale articles for more information on those.
What Fees Do You Pay When Buying a House at Auction?
One of the things that worry new investors is that they’ll get swindled by extra, hidden fees after winning an auction. While this is understandable, it’s not something to worry about.
Public auctions have no additional fees. Private auctions may have additional costs, but they’re required to disclose those before bidding begins. If you ever run into an auction house that won’t give you this information, steer clear and report them as they’re most likely operating an unethical and potentially illegal business.
A Few Tips for Buying a Property at Auction
Now that you’re feeling well-versed in the goings-on at an auction, let me give you a few tips for how to navigate the bidding process successfully.
Don’t get emotional – This is my number one tip, and it’s easier said than done. Too often, investors and potential homeowners will get competitive and start a bidding war they cannot win. Do your best to remove emotion from this process.
Pick a hard max bid – Whenever I go to an auction, I go with a predetermined amount I’m willing to spend, and I stick to it. This will require discipline on your end, but remember that there will always be new properties available, and it’s not in your interest to go over your budget.
Do your due diligence – Make sure you understand the requirements, fee structure, and condition of the property as best you can before going to an auction. If you’re able to get a title report pulled, be sure to do that ahead of time. The more information you’re equipped with, the better off you’ll be.
Whether you’re heading to an auction to invest in a new fix & flip, rental, or are even looking for your next home, it’s important to understand what fees do you pay when buying a house at auction and the type of auction you’ll be attending and what all comes along with the auction process. Follow the tips in this article, and you’ll be well ahead of your competitors (seriously. You’d be surprised!) and may just land an incredible deal.
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