Learn Me: Buying Houses at Auction

An interesting potential opportunity popped up, so naturally I'm obsessed with trying to learn everything I can to have a good idea of how things could go. Long story short, a "project house" is up for auction and I am potentially interested in it. 

There is an open house tomorrow that I plan to attend, and make a list of what needs work and then work up an estimate of how much that would cost. The house isn't a total project, supposedly half of it is move in ready, and the other half needs some work, and the yard needs some major cleanup. 

Auction site says: 

Auction Terms:

$5,000 in certified funds day of auction. 10% Buyers Premium added to final bid price. Balance due in 45 days. Announcements made on day of sale take precedence over all printed material.

So say for easy math it's a $50k house. If I win the auction @ $50k, I have to pay them $5k immediately. Then, within 45 days pay them the remaining $45k + $5k buyers premium, yeah? The math seems easy enough, and the immediate cash is a set number, not a percentage, so if I go intending to purchase, I know how much I need to have in hand, $5k. 

So, that part seems simple enough, but what are the risks to buying at auction?

-No home inspection before hand, so I need to look as close as possible to know what I'm getting into

-Lien issues? I saw something online about the risk of there being a lien on the house when buying at auction. I guess this is because there is no title search done ahead of the auction? How can I be safe here?

-A conventional mortgage might be tricky to obtain for an auction purchased house, and needs to be able to happen quickly due to the 45 days. (Pretty sure FHA, VA, and USDA loans would be out of the question as it probably wouldn't completely pass a home inspection. Again, project house. Again,  I haven't really seen it yet to know how bad or not bad it is.)'

-What else am I missing?

$5,000 in certified funds day of auction.

Does this mean you have to hand over a $5k check on the day of the auction in order to get a bidder number?  If you are not the high bidder, they hand you back your check?  

Said another way...Prove you are a "real buyer" by bring $5k with you.  Give it to us first.  This way you can not run up the price and then back out later.  I guess you can back out but we're keeping the $5k.  

You'll want to be pre-approved for lending if you need to be done at closing in 45 days.  This will also help you know if the lender will "lend on auction". 

John Welsh said:

$5,000 in certified funds day of auction.

Does this mean you have to hand over a $5k check on the day of the auction in order to get a bidder number?  If you are not the high bidder, they hand you back your check?  

Said another way...Prove you are a "real buyer" by bring $5k with you.  Give it to us first.  This way you can not run up the price and then back out later.  I guess you can back out but we're keeping the $5k.  

Hmmm, not totally sure there. Thanks for bringing that up. I was thinking that is was have $5k on hand, due upon winning bid. I may call them to clarify. 

I bid once, over 7 years ago at my County Sheriffs Auctions here in Ohio (I did not win.)  I seem to remember bringing a check.  I seem to remember you handed the actual check to a Deputy before you were allowed to speak/bid.  At the end, as a non-winner, he handed me back the exact paper/check.  

I went to the Sheriffs FAQ's and found this:  

 Have your deposit check at the sale or your bid will not be accepted. Have your cashier's check or money order from bank made out to THE ERIE COUNTY SHERIFF’S OFFICE.

Caution: This is a Court function; if the sale is not completed, you are subject to being held in contempt of court.

Of course, this could all vary by location and state. 

From what I've looked into from buying two different homes in the last 9 years, auction and foreclosure homes are typically cash sales. IE, if it's $50k, you have $50k in cash to pay for it. 

Mortgage companies don't want to mess with them, typically. The house may be in such bad shape and insurance company won't write insurance for it, etc etc. 

Even when I asked around, there aren't many that even want to deal with 203k loan.

Financing is going to be your big question. It could be easy or it could be impossible. They say no home inspection but will they give an appraiser access? I imagine you would just have to present the check if you win the bid but as John Welsh says different auctions are different. I’ve bid at a couple and didn’t have to give payment for the deposit until after bidding. I won one - an online auction - and the process was not without pitfalls. We got a good deal and everything worked out but patience and being on top of things were both required. 

There will be almost no way to get bank financing in that time unless you golf with the bank president.  Banks only loan of things that area in good condition and move-in ready.  Except for that one program that may not exist anymore.   You will need a private loan if you don't have the cash.   My daughter and her boss do this all the time.  Some are tax auctions or foreclosures.  They are susceptible to mortgages (plus penaltie$), law suits and IRS liens (those are fun).   They usually pay a few thou to "quieten" the title.  In fact, she is at an auction in Chucktown today.                

In reply to dculberson :

Sounds like a home inspection is not impossible to have done, I would expect the same for an appraiser, but in an auction situation that may drive the value up depending on how the results are handled. I suppose it could also drive it down too, but I think this is why most people at auctions like these are pretty experienced and know what to look for. 

Information is key. Try to find whatever history you can about the property from your local GIS. You can usually see price and tax history as well as previous owners. Talk to the local assessor's office. Was it a basic foreclosure, or was it a tax lien? If it's a tax lien, would the winner be required to pay the back taxes? If you can visit the property before hand and walk around the outside, maybe talk to some neighbors to see what happened. It would be nice to find out if the previous owners went through a divorce and had to foreclose (good for you), or if it was a meth lab that was seized after the owners went to jail (bad for you).

You should also find out if this is an absolute auction, (where the highest bid will definitely get the home) or if the lender can refuse the sale if the highest bid isn't deemed high enough. Looking at the GIS info might clue you in to how much was leant and/or still owed. That can clue you in about what the lender might or might not sell it for.

Then, if you're comfortable buying the property you need to figure out the finances. That seems like it could really vary depending on your situation and the specific property.

Will seller be giving you a warranty deed, a quitclaim deed, a trustee's deed? Need to know how they plan  to convey to determine status of liens, Etc

. More importantly, who's selling it? Bank, individual, tax assessor, Sheriff sale?

In reply to Ovid_and_Flem :

I did find out that it is being sold by an individual. 

In reply to AWSX1686 :

Lien issues? I saw something online about the risk of there being a lien on the house when buying at auction. I guess this is because there is no title search done ahead of the auction? How can I be safe here?

Bottom line- you probably can’t be. 

This is the big bad wolf of auction/ tax sales. It’s the risk the buyer takes. It’s also why you pretty much have to have the cash on hand and can’t get conventional financing.

That’s why there is big money to be made in these....there is big risk. 

You may be able to hire someone (lawyer, etc) to do a title search in advance (assuming there is time), but it’s on your nickel. 

I'll try to update later with my summary of what I learned so far and where I'm at.

In reply to AWSX1686 :

does the auction information tell you what kind of deed they will be providing? You can call a title insurance company local to you and have a title opinion done. Shouldn't cost more than $150 or so. Will tell you who record owner is, any tax liens or construction liens, any outstanding mortgages, any pending litigation , Etc. You may want to buy title insurance to be safe. Usually runs three or four dollars per thousand

 warranty deed warrants if they have clear title subject to any exceptions in the deed. Safest bet.

 quit claim deed merely conveys whatever they have if anything. No warranty as to outstanding liens.

So the auction site has a PDF with a bunch of info, with the seller's disclosure, DEED, etc. The disclosure doesn't say anything that isn't obvious when walking through the house. The deed implies that it is owned outright. Which makes sense because from what I can tell, the current owner bought it in early 2014 from a sheriff safe, which probably needed the cash up front. 

It needs more work than I thought, but most of it I can do myself. Some stuff will require permits, but that shouldn't be too bad. 

Mostly now I'm trying to bounce it off of my real estate / rental friend as he's done rehab&rent projects like this a bunch of times before, and it did seem promising to him. And he could potentially be my financing, which would let me fix it up to a level that it would appraise well and then get a mortgage in a year to pay him off.  It comes down to numbers, how much do I think I could get it for it I made a pre-auction offer, how much would it take and how long to fix up, and how would it appraise once complete. Gonna try and chat with him tonight. It would be a big undertaking that would probably prevent me from coming to the 2019 challenge, but the long term payoff is probably worth it. I don't have any kids right now, so it kinda makes sense to push to get residual income streams in place ahead of time. Plus potential nice garage only a couple block from my current house. 

“A couple blocks from your house”...

Thats probably the best part. 

In reply to SVreX :

It does make working on it easier. And if I do keep the garage separate for myself or me and my buddy closer is better. 

I'm no expert, but I had looked into this.  A traditional sale includes the closing period during which a company researches the deed, an inspector who helps identify bad things, and contracts that give you ways out of the deal.  There are also laws that require accurate disclosure of property facts that don't necessarily exist with an auction.

With an auction, that all falls to you.  DO YOUR RESEARCH.  If you buy a house and there is a deed problem, you are in for a heap of red tape.  Or if you miss the massive termite damage in the crawlspace and have to rebuild the floor and foundation for $9000, it kinda kills the joy.

Traditional sales, you have a deed research team, a bank, an inspector, and tons of contract protection... all of which dots Is and crosses Ts for you.  With an auction you have basically zilch.

I funding comes through I hope to put an offer in prior to Auction tomorrow. Potentially.

I did find out that both with the sale terms if they accept an offer ahead of time, as well as the sale terms if purchased at auction, the only way to get the $5000 deposit back is if there are title/deed issues. This Auction house only deals with non-forclosure type sales, so the seller has promised a clean deed, if it is found to have issues is the only reason allowed to back out. 

If they do not accept the offer, or we don't get it in in time, and it goes to auction, I will not likely be bidding on it. I plan to attend the auction for a learning experience if that does happen, but logistics to participate in the auction don't look like they would work out. Then there is the potential that it doesn't sell at auction...

I do also know that there have been no offers made so far. 

As part of closing, the settlement company can get me deed insurance, search, etc as part of that and I'll be covered. 

Not going to be submitting an offer today, or likely at all.

Before going too far my partner contacted another local investor who he knew had interest in the place to feel out his interest because we didn't want to start a bidding war. They got to talking and his numbers came out a good bit different than ours. He tipped us off to potential damage from wood eating beetles (I think he said Deathwatch Beetles) that would cause the garage to need an expensive new roof, and there could potentially be damage in the house too. He also mentioned a possibility depending on what type of loan the previous owner got on the house, there could be an outstanding loan that could make things interesting. Very valuable phone call!

Now I plan to go to the next open house on Saturday with a ladder and see if it does in fact look like these beetles are present. Due to timing then, even if we were still interested, it would not really be enough time to have an offer considered prior to the auction. I plan to leave work a little early on Tuesday to attend the auction so that I can see what it's like, and what it goes for. I do not plan on bidding at the auction, even if we find that the beetles are not present. There's always a chance that it doesn't sell at auction, in which case, there could still be potential for a deal to be made, but mostly I've written this off as a learning experience. I know more than I did, and hopefully I can save up some money so when another opportunity comes along I'll be in a better position to make the money side work easier. 

Good move in my opinion