We're seeing more and more homes go to auction these days and thought it might be helpful to put together a list of things to know. Auctions can be tricky, especially if you're going in blind without doing your research first. Melissa and I attended an auction with a client a few months ago. Before we jump into things to know here's a quick video that we took that day:
1. Before bidding on an auction property,do your homework! When purchasing auction properties, they typically don't allow an inspection or due diligence period. Do any necessary inspecitons prior to bidding on the property. If you don't win the bid, you're out of the money spent on the inspections, but better safe than sorry. If you don't have an inspection first and bid on a property only to find a major issue later down the road and try to back out, you will lose your earnest money and/or any deposits which will hurt the pocket more than the inspection fee).
2. Auctions typically charge a "buyer's premium" that is added on to the sales price. It's normally between 5-10% of the sales price. So if you're the winning bidder at $100,000, they will add 5% to that, to make the total amount $105,000. Keep this in mind when bidding. If you're prequalified to $100,000, then you wouldn't want to bid anymore than $95,000 if there's a 5% premium.
3. Auction properties normally call for more earnest money than the area standard. For example, REDC Auctions call for 5% in earnest money (15% for every additional property purchased). So if you put an auction property under contract for $210,000 ($200k purchase price + $10,000 premium), you're looking at earnest money of $10,500! What a huge amount to risk losing if for some reason you don't close!
4. Closings must typically take place within 30 days of the auction. No excuses! If you don't close by the deadline, then you risk losing your big chunk of earnest money! Doesn't matter if it's the lender's fault or if you only need 3 more days to get it closed. 30 days... that's it.
5. They don't offer financing contingency periods so be sure that you're 130% confident in your lender and make sure the lender knows they only have 30 days to prepare the loan and have it ready to close.
6. Some auction companies require a loan commitment letter from the lender with no conditions if the buyer is obtaining financing to purchase the property. If your lender can't offer a commitment letter with NO conditions, then they require that you use their on site lender.
7. All winning bids must still be approved by the seller. If you're the winning bidder, don't get too excited until you know the bid has been approved. This is where the deal sometimes dies and the property comes back on the market.
8. We've seen some auction companies open the auction back up "one last time" online after they had a winning bid on a property. Seems like they're trying one last time to sell the property at a higher price than what you bid. Not fair, huh?
9. They do allow agents to represent buyers, but you must register your agent when you register. If you don't, then you have to navigate through the auctioin process by yourself. Yikes!
Of course the rules are different depending upon which auction company you're dealing with, but the above mentioned tips are things to look for because they're common amongst the big auction companies in this area! Have questions? Please feel free to email us!