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Creative Buying: Foreclosure & Owner Auctions

written by: •edited by: Rebecca Scudder•updated: 11/1/2011

There are two ways to purchase a home at an auction. Foreclosure auctions and by owner auctions work slightly differently. Both methods will require you to understand how to buy a house at an auction and what challenges you might be facing when doing so.

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    Buying a Home at Auction: Auction Types

    For those who are considering purchasing a house at an auction, there are two types of auctions where you may find a home. Each auction has different rules depending on who is handling the auction. They also have different rules regarding payment of the balance after the auction is won. Regardless of the type of auction, your success depends on you understanding the process.

    real estate auction Seller Auction - Homes that are placed under an auction agreement by a seller generally are placed on auction agreements by a homeowner who is interested in selling fast. In some cases, these homeowners have had their home on the market and have not received an offer that is acceptable. In these cases, the auction company sets the price with the homeowner. There are seller fees involved in auctions that the seller may ask the buyer to share.

    In this case, generally the seller or the auctioneer will set a date for the auction, they will post the date for a specific period of time and the terms will be explained to potential buyers. In most cases, the property will be available for viewing prior to the auction to allow potential buyers the opportunity to view the property just as they would if the home were for sale by an owner or listed with a real estate agent.

    Foreclosure Sale Foreclosure Auction - Depending on the municipality, these auctions may be conducted at the property or at the courthouse. In some areas, the auction is carried out by a licensed auctioneer and in others by a representative from the Sherriff’s department. The process for foreclosure auctions is significantly different than that of an auction by owner. In this instance, the lender is required to make specific legal notifications to other lien-holders and they are also required to make specific public notices regarding the auction date. In almost all cases, there will be no opportunity for those interested in purchasing the property to view the property before the date of the auction. Outside of being able to drive by the property, there is no guarantee as to what the interior of the home may look like.

    In the cases of a bank foreclosure auction, the terms are generally explained in the auction notifications that are pre-published. The lender may require a fixed amount down or they may state that the down-payment be a percentage of the winning bid. Nearly all auctions will have a fixed down-payment requirement.

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    Warnings when Buying a House at an Auction

    800px-Sign of the Times-Foreclosure There are some warnings that you must be aware of when you are considering buying a house through an auction. Since a buyer at a seller's auction has the opportunity to meet the seller and review the property, the risk is far less than buying at foreclosure auctions. Here are some of the things you need to be aware of as you are learning:

    Title problems - while it is the responsibility of the lender to ensure clear title, issues can and do arise. Before attending a foreclosure auction, you may want to run your own title search and find out about other liens and encumbrances. Failing to do this could mean a lengthy fight after the auction;

    Property status - it is a good idea to find out ahead of time if the property is occupied. This can be both good and bad. If the property is occupied it generally means it is in livable condition (reducing the risk that you will have to make extensive repairs). However, this presents another set of problems in that there must be an agreement (with the lender) as to who is responsible for requiring the residents to move from the property.

    Rights of redemption - several states allow those who have faced the foreclosure process to exercise rights of redemption after a foreclosure. If the auction is taking place prior to those rights expriing, the homeowner may still pay off the balance that is in arrears and reclaim their home.

    These are only a few possible complications that you need to be aware of when buying property at a foreclosure auction.

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    Financing Requirements for House Auctions

    Financing There is little doubt that for those who are trying to learn how to buy a house at an auction that they need to understand the pitfalls of financing their purchase. While a traditional auction where the seller is placing the home up for auction may allow more time to finance, in general, a foreclosure auction requires that the full value be paid within thirty (30) days of financing. Here are some other things you need to know about financing a house that is purchased at an auction.

    Money needed immediately - in general, the auction notification will advise how much is required as a down payment at the time of auction. Typically the lender will only accept fully certified funds. This means if you are going to bid on a home at auction you will want to bring a cashier's check or money orders with you. If you know the amount that is required, you can get an exact amount. If the down-payment requirement is a percentage of the auction amount, you can take several denominations of money orders or certified checks with you that represent the maximum amount you wish to bid;

    Getting financing after auction - for those who are planning to attend a house auction, a mortgage pre-approval could prove to be very helpful. In the case of foreclosure auctions, most cases will require that the entire amount be paid within thirty (30) days of the close of the auction. Since financing requires intensive paperwork along with a home appraisal, home inspection and verification of income, assets and expenses, the process can often take longer. Pre-approvals allow you to bid at an auction without unnecessary delays holding up the home closing.

    It is also important that you have all of the information necessary for a title search, for your insurance company and for the home inspector and appraiser.

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    Buying your house from an auction can result in getting the home of your dreams for less money than you might think. Understanding the potential problems you can encounter can help you be better prepared. Before you bid at a foreclosure auction, make sure that you are fully aware of the legal and financial considerations that you could be facing.