Real Estate Auctions And How They Work In San Diego

Dated: 08/04/2017

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Interested in buying a home through an auction but not sure how it works or if it’s right for you? We are here to answer any questions you may have and inform you a little more about buying a home through an auction.

Let’s start off with the basic information one needs to know before bidding at an auction. A real estate auction is a sale of properties open to the public. There are several reasons why a property could be put up for auction; these include: foreclosed homes, homes that have been re-possessed by the bank and the bank wants to recover the money that it had lent, or if the original homeowner owed the government enough money for it to reclaim and sell the house. With that being said, not all homes are in the best condition and can have some serious maintenance issues, so it is vital to do your research and read all materials and disclosures about the property during the pre-auction period. Make sure to check that the property has no liens or encumbrances towards the home. Attend any open houses for the home but be warned that viewing the home in that way is not the same as conducting a thorough inspection (which is not allowed until after you purchase the home). It is better to take an inspector with you to have walk through at the open house so they can give you a better idea of any problems the home may have and the costs involved to fix them. There is also a possibility that some properties will not allow tours before the auction, but that does not mean one has to purchase blindly. Work with the auction company and do prior research of the home’s title and drive by the home and view it from the outside to see if there are any visible outdoor maintenance issues.

After doing the research, if you’re planning to place a bid for a property, you should be prepared to pay for the property at the auction, so it is important to bring along a cashier’s check for the specified amount of money the auction holder requires to complete the purchase. If the auction allows financing, become pre-qualified before you start bidding. Auction winners must go through a property closing just like a traditional real estate transaction. There will also be auction fees. Most importantly, be sure you can pay for the home. If you withdraw a winning bid, you will face massive penalties. Make sure you keep in mind that above the price you plan to offer, you include any inspector fees, potential costs for repairs, and keep in mind that you’ll have to pay the buyer’s premium if you purchase the home.

Here are a few important things to know:

  • What is a buyer’s premium?  

A buyer’s premium is an additional amount that is added to the sale price or the winning bid price, which is charged by the auctioneer to cover administrative expenses. The buyer's premium goes directly to the auction house and not to the seller. According to Auction.com, a Buyer’s Premium is typically 5% of the Winning Bid Amount.

  • What is a special warranty deed?

A special warranty deed is a deed in which the seller guarantees the title against defects stemming from the period of his or her ownership of the property. The grantor makes no warranty against defects existing before the time of his or her ownership.

  • Why is it not recommended for first time buyers to look at auction properties?

It is advised that unless you have a wealth of knowledge about homes in an auction or have conducted very thorough research towards bidding at an auction, a first time home buyer should not purchase at an auction. There are several things that could go wrong, one main thing being that if you are not aware of liens placed against the property, you will be held liable for them and will have to pay them off.

  • What happens with an auction property that is occupied?

If you purchase a home that is still occupied by the tenant, there is a very big possibility that you could be waiting several months for the tenant to be evicted. You could try to to have the eviction process run much faster by getting into an agreement with the tenant and paying them a specified amount of money so they will leave the home, take their belongings with them, and not vandalize the home. What can also happen is that they will not want to leave and you could either have them be your tenants and pay you, or have to deal with lawyers and court to have them evicted. Either way, if the tenant is sour about the whole eviction, you will end up having to pay extra money to get to enter the home, so it is always good to take note of those extra expenditures.

  • What if after having your bid accepted you find out major issues with the home and need to cancel?

If you buy a home through auction, you need to understand that the property will come in “as is” condition, meaning that you’re buying the home in its present, existing condition. If the home you won the bid for has major issues and you did not know of it until after the big win, chances are you’re out of luck. In regular transactions, there is a cooling-off period during which the purchaser can decide to cancel a sales contract without loss, but that is not the case with homes sold in auctions.

  • What if I want to purchase with a loan?

Most online transactions are based on cash purchases. Conventional bank financing is dependent upon title and appraisal which take time a foreclosure auction does not allow. Also, very few lenders would consider lending since you will be buying the property without title insurance. If you are able to get a loan from a private investor or company, it would be a hard money loan which is based on your assets, meaning that the money borrowed will be secured by your real property. However, these loans are only available to investors and not owner occupants. Be warned that the loans will have excessive fees and extremely high rates.

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