2.7 min read
What Are Home Auctions?
Home auctions are sales events during which property owners can sell homes to buyers without going through regular channels. Typically, home auctions are carried out when homeowners lose control of their home due to foreclosure or other issues. The bank or property owner wants to sell the house as quickly as possible to recoup some of their costs.
Home auctions can be beneficial for potential home buyers because it is possible to purchase high-quality properties at a discount or more quickly than usual. However, home auctions can also be risky because buyers must compete with a generally wider pool of competitors, along with other reasons we'll outline later.
How Do Home Auctions Work?
Homeowners sometimes miss mortgage payments or experience other life events that result in their property being foreclosed on. In these instances, the bank or lending institution that owns the property can evict the homeowner and place the home in a foreclosure auction. Home or foreclosure auctions are typically held by trustees hired by the bank or lending institution hoping that the house will sell quickly so the lending institution can recover as much of its costs as possible.
There are two main types of home auctions: confirmation and absolute auctions.
Confirmation auctions allow the lender to accept or refuse the winning bid, in which case they can refuse to sell a house for too low of a price. Absolute auctions result in the house being sold to the highest bidder regardless of the lender's target price.
Should You Buy a House at a Home Auction?
It depends. Home auctions can be valuable places to find high-quality property because:
- In most cases, banks are desperate to get rid of the property to recoup some of the money lost due to the foreclosure. Savvy buyers can sometimes snag properties for steep discounts.
- Home auctions often result in faster property acquisition for buyers as there are fewer negotiations to work through.
However, it's also generally regarded as risky to purchase property at home auctions. That's because:
- Most home auctions do not allow prospective buyers to walk through the properties. Buyers have to look at pictures, if they are available and use other information to determine whether the property is a good purchase.
- There's always a chance that a property has something seriously wrong with it, which is why it is being sold at auction instead of through traditional avenues.
- Many auctioned homes have not been well taken care of because their owners were in dire financial situations. There may be a significant amount of repair or maintenance work required before the property can be sold again for a profit.
- Home auctions may draw in lots of competing bidders. A prospective buyer could quickly lose the auction because a competing bidder places slightly more money on the line right before the auction closes.
Ultimately, home auctions are viable, if risky, methods of selling and buying property. Those looking to use them to buy or sell a house should do so with caution.