Like anything else, buying at auction can be a good deal, or a rotten deal depending on what you buy and what the terms are.  While there can be upside at an auction sale, the downside is much more frightening and should never be attempted without proper advice and education.

Each month we see big auctions advertised on billboards, newspapers and such touting bargains.  I’ve attended several auctions and I’ve learned many things.  In this article I’ll attempt to educate you on some of the things to watch out for that you might not know about.

Is Buying at Auction a Good Deal?

At one auction I noticed a group of people in front and another group in back.  One group kept bidding up the property to prices higher than market value and I wondered why.  Later on I discovered that when they won the bid for some reason they didn’t finalize a contract and the property went back out for re-bid.  This happened as many as 2-3 times per property.  At the end of the night when the crowd had thinned the property was purchased for much less by an investor who really wanted the property.  Essentially it was off the market all night tied up in contract sessions.

Another thing to look out for is reserve versus absolute auction.  An absolute auction means the property will be sold to highest bidder no matter what.  If it’s reserve, you never really know what the reserve is and they try and negotiate with you after you’re awarded the winning bid, so be prepared.

If you’re buying a condominium, or even in a homeowners association for that matter, I would look not only at the property, but also the association.  You may purchase and be the only one paying condo or HOA dues.  This may also make it impossible to sell your property to anyone but a cash buyer as lenders will not lend if the association doesn’t meet certain requirements.

Many are surprised to learn that the title work isn’t sufficient to actually sell the property.  Some have learned they may need to file suit to Quiet Title after they receive what they thought was good title to property.  There is a difference between insurable title and marketable title, and title policies today can exempt many things leaving you the purchaser holding the bag.

The property may also have many defects that aren’t known or get lost in the shuffle, and the buyer inherits them.  At one particular auction I’ve attended, once you put down your non-refundable deposit, you lose it regardless of whether you cannot get the mortgage (even if they promised to give you one at the auction) or if the property has major defects.  You simply MUST inspect the property beforehand or you will most likely be surprised afterwards.  I saw one home when the back half of the home was missing, and the buyer lost their deposit of 10%.  Additionally, if the air conditioner gets stolen prior to closing or damage occurs to property between auction and closing, it’s the buyer’s responsibility, so you are taking All the risks.

You also want to research code enforcement liens, fines for improper permitting, etc.  I had a house listed in Cape Coral with about $70,000 in fines, and a lot in Cape Coral with over $90,000 in fines by code enforcement.  We recently sold a $20,000 lot in Ft Myers with over $200,000 in fines.  In each case we rectified the problems before closing or didn’t close at all in the latter case, but this would not be true at an auction as the buyer would be stuck assuming those fees.

I attended one auction whereby the winning bidder put down their 10% and agreed to finance the unit through the bank at the auction.  They were approved on the spot for financing.  The problem is the property did not qualify because too many people weren’t paying their dues, and the loan was denied on that basis.  The new lender was the same lender selling the property at this foreclosure auction.  The lender obviously knew the property did not meet FNMA guidelines but they sold it to a buyer obtaining financing anyway, and in fact approved their loan.  The buyer was astonished to learn that after being approved, they were later denied, and their escrow deposit was being retained by the seller (the bank) for non-performance of the contract.

Like we said in the first paragraph, sometimes a good deal isn’t a good deal when it’s rotten.  You must thoroughly investigate the property, the association, the contract, the market, the financing, and the title work before you bid or you run the risk of being let down later.

If everything checks out to your satisfaction upfront, we would also encourage you to set limits on what you’re willing to offer so you don’t get caught up in the moment and overpay, only to find out later it doesn’t appraise and your loan is denied and deposit forfeited, unless of course you’re a cash buyer and don’t mind paying too much.

Like anything, an auction is just another way to buy and sell, and no matter which vehicle you use, please be sure to work with professionals and do your homework upfront.  You’ll be glad you did later.  Happy house hunting!