Stop Overbidding When Buying a House at Auction

By Emily Southey | 16minute read

There are many ways to purchase a home. For example, you can buy a home from a seller, from a deceased estate, or from a real estate auction. The latter is what we’ll be diving into today.

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How Do House Auctions Work?

House auctions, also known as real estate auctions, involve the sale of homes often at or below market value. These homes are typically foreclosed properties or properties in which the owner has defaulted on their property taxes. House auctions share some similarities to traditional home sales, but there are also several key differences.

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For example, like a traditional home sale, a listing for each property at a house auction is created. However, unlike a typical home sale, the listing might be posted weeks in advance to generate interest and prospective bidders can register in advance to place a bid on a home. In most cases, the seller will set a minimum price threshold, and the home is ultimately granted to the buyer who bids the most. Real estate auctions can take place in person or online.

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Real Estate Investors

Most real estate auctions have strict rules. For example, some do not allow financed purchases. For this reason, bidders at real estate auctions are often real estate investors because they can afford to buy a home with cash. In contrast, housing auctions that allow financed purchases open things up to a wider pool of buyers. However, there may still be rules around financed purchases. For example, homebuyers might need to be pre-qualified or pre-approved for a mortgage.  

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Home Auction Terms

As mentioned, real estate auctions usually have rules, otherwise known as terms and conditions. Bidders must be aware of these terms before purchasing a property at a house auction. Typically, the rules will be clearly outlined on the auctioneer’s website and read aloud before the start of the auction. While home auction terms vary, some of the most common conditions are as follows:

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• Properties being sold are sold in as-is condition, meaning the seller is not responsible for any improvements or repairs;
• Home sales are subject to a set deposit amount (typically 10%), which is due the day of the sale; and
• Properties are sold without any conditions or contingencies (however, home inspections are often allowed before the sale of the home).

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Types of Auctions

Real estate auctions involve bidders placing bids on homes for sale. However, there are multiple types of auctions, including open bid and blind bid auctions. 

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Open

Open bid auctions are those in which bidders know the amounts of other bids that have been made. Bidders tend to prefer open auctions owing to the increased transparency. Seeing what others have offered allows them to bid more strategically, raising their bid gradually as opposed to overbidding. The downside of open auctions is that they can lead to lengthy bidding wars, driving up the purchase price.

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Blind

Blind auctions function as follows: Bidders are required to make bids on a home without knowing how much others are bidding. Blind auctions are often preferred by sellers, as well as real estate investors who, as experts in the industry, might have a good sense of how much money to bid. In contrast, regular homebuyers might be at a disadvantage in blind auctions as their lack of knowledge coupled with the lack of transparency might lead to overbidding. 

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How Homes End Up at an Auction

The two most common ways that a house ends up at a real estate auction are foreclosure and defaulting on property tax payments. 

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Foreclosure 

If a homeowner has defaulted on their mortgage payments and has failed to work out a repayment deal with their mortgage lender, they may end up in foreclosure. The foreclosure process usually begins after several months of nonpayment. Foreclosure rules vary but may require that the loan payment be a minimum of 120 days late or that the lender makes reasonable efforts to contact the borrower with alternative options. 

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If the homeowner fails to make payment, the mortgage lender can evict them for nonpayment and put the home up for auction. The auction is typically run by a trustee hired by the lender.

Property Tax Default 

Another way a property ends up at auction is when the homeowner fails to pay the required property taxes. In this case, it is the tax authority that seizes the property, not the mortgage lender. If the property has tax liens against it, there are two ways to proceed. The first is with a tax lien sale, where the liens are auctioned off to the highest bidder. The second is a tax deed sale, whereby the house (along with its unpaid property taxes on the title) can be sold at a real estate auction. 

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How Much Should You Bid on a House?

How much you should bid on a house at auction is a major decision, especially in the case of a blind auction. The process of deciding how much to bid on a house at auction is similar to the process of deciding how much to offer in a regular home sale. 

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As a general rule, you should compare the listing price to the value of other comparable homes in the neighbourhood. You can do this research online or hire a REALTOR® to help you. You should also be aware of general market conditions. For example, if the market is hot, there are likely to be many bidders driving the price up. But if it is cool, buyers may have the upper hand. Of course, if it’s an open auction, you may also base your decision on the amounts that other bidders have bid. Finally, with any home purchase, whether you’re buying a house at an auction or not, you never want to submit a lowball offer, which can offend the seller. Thankfully, many auctions have minimum bids that prohibit home sales unless the minimum bid is reached.

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Minimum Bid Auction

A minimum bid, also known as a reserve price, is the lowest price at which the item up for auction can be sold. In the case of a real estate auction, the final bid must meet the minimum bid requirements. If it doesn’t, the home remains unsold. Please note that minimum bids and opening or starting bids are not always the same. 

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How to Find Real Estate Auctions Near You

Perhaps the easiest and most convenient way of finding a real estate auction near you is to search on the internet. You can visit an auctioneer’s website or enter a simple Google search for housing actions in your city. As the internet is not always accurate, it’s important to confirm any information you find directly with the seller or auctioneer. 

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Beyond the internet, prospective homebuyers can also contact their local government or local REALTORS® or brokers.

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In-Person Versus Online Housing Auctions

Nowadays, real estate auctions can be conducted in person or online. We break down each type of auction below.

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In-Person Auction

In-person auctions often occur at local courthouses. While exciting, they can also be overwhelming, which is why we recommend attending several in-person auctions before you ever plan to make a bid. Despite the auction taking place in person, information about the home up for auction can usually be found on the auctioneer’s website in advance. 

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Online Auction

Real estate auctions are increasingly being conducted online. This is ideal for all types of bidders but especially first-time bidders, as access to key information is easier. For most online auctions, bidders must pre-register on the auction website. You may also have to provide proof of mortgage pre-qualification to prove you are a serious bidder. Although online auctions are incredibly convenient, their increased accessibility may translate to greater competition. 

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Tips on How to Buy a House at Auction

Ready to buy a house at auction? Follow the tips below to ensure everything goes according to plan.

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1. Prepare your finances or get pre-approved for a mortgage

If you’re buying a home at auction with cash, make sure you have the necessary finances to afford the purchase. Alternatively, if you’re financing your purchase through a mortgage, be sure to get pre-approved in advance. Gather the necessary documents for pre-approval (which range from personal identification to proof of employment) and contact a mortgage lender or broker to get started. Make sure to acquire a pre-approval letter from your lender. Beyond getting pre-approved for a mortgage, buyers will need to make sure they have the necessary funds to pay for the down payment (which is typically 10% of the winning bid). If successful, this 10% deposit will be due within 24 or 48 hours. 

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2. Sign up for email notifications

Most real estate auction websites allow users to enter their email addresses and sign up for alerts about upcoming auctions. So if you want to be in the know about future auctions, be sure to take advantage of this feature. Most house auction websites encourage users to enter their budget and preferred neighbourhoods so you receive notifications for properties that fit your specific criteria. 

3. Research the local housing market

To make your bid as attractive as possible while avoiding overbidding, research the local housing market to gain a better understanding of what comparable homes in that neighbourhood are selling for. 

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4. Pre-register for the auction

Most auctions, especially online auctions, require bidders to pre-register. So as soon as you see a house you’re interested in, be sure to register with the auctioneer.

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5. Schedule a home inspection

As mentioned above, homes at auctions are typically sold as-is. In other words, no homebuying conditions, such as a home inspection contingency, can be added. However, most auction companies post information about available homes a minimum of 30 to 45 days before the auction date. They also host open houses, giving prospective buyers a chance to visit the property in person. During this period, it’s also wise for buyers to schedule a home inspection since the home sale will not be conditional on a satisfactory home inspection. To ensure everything is up to snuff, the period between the home being listed and the auction is the ideal window to conduct a home inspection. 

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6. Budget for a buyer’s premium

Some auction companies charge a buyer’s premium of 5% or 10% of the listing price to cover the cost of the sale. If this is the case at a real estate auction you’re intending to participate in, make sure to budget for this and factor it into your bid.

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7. Learn the rules and follow them

Whether the auction takes place online or in person, make sure to read the rules carefully. The rules will be posted on the auctioneer’s website in advance. For example, there might be important rules relating to financed purchases, such as if a buyer’s financing falls through, the seller is allowed to keep the deposit and possibly even sue you for breach of contract. Understanding these rules and following them is crucial to a successful auction experience.