What does it mean to buy a house at auction?
A home auction is when you buy a house that is being auctioned off, either due to tax or mortgage foreclosure. You can purchase a home at an extreme discount from this type of sale. It is usually the bank or city working to get money back after a borrower or owner defaults on payments. Some buyers prefer to purchase homes from foreclosures due to the reduced price. Typically, it’s investors and people looking to flip the property for profit. Therefore, it can be a risky process on how to buy a house at auction for many different reasons.
Types of home auctions: How to Buy a House at Auction
Before you search for ways involving how to buy a house at auction. You should be aware of what type of auction you are purchasing from. There are two types of auctions in which you can purchase a home. One of them is bank owned or a sheriff sale. Additionally, the other type of home auction is tax sales and tax deed auctions.
Bank-owned, or REO sales, are when a homeowner has a mortgage on a property and falls behind on payments. The lender will give a notice when the owner begins falling a few months behind. Once they hit that 4-month mark of non-payments, then the mortgage company will start the formal foreclosure process. It’s vital to keep in mind that some lenders can start the process sooner than four months.
A tax lien is another type of foreclosure. This can happen while an owner doesn’t even have a mortgage on the home. Yearly taxes are always due on a property you own. They consist of state, local, and school taxes. This amount will typically go up over the years, especially if there are improvements in your area. If an owner does not pay their property tax over time, the local township or city will take the home through foreclosure.
Pros and cons of buying a house at auction
There are many pros and cons of purchasing a home at auction. Understanding each one can help you better understand if this is a process you want to take or not.
The Pros: How to Buy a House at Auction
- You are purchasing a house lower than market value. The city or bank that is selling the house will most of the time just want enough to pay what is owed on the property. Which this amount is usually lower than the market value.
- These houses are typically great for investment purposes. If you are looking to buy a rental property or fix and flip, you can find yourself making a good profit on purchasing these types of properties.
- They are always sold as is, so you’re getting a house that you can completely customize the way you want. Great for homeowners who have a contractor and are ready and capable of designing their dream home.
Cons of Purchasing a House at an Auction
- There are plenty of negative reasons for buying a home at an auction. The first one is if you are buying a tax sale home in Philadelphia. The owner has up to a year to obtain the house back. All they need to do is pay back the amount of taxes that is owed. It can be up to a year for the old owner to obtain rights to their home.
- Typically, these homes are in very rough shape. So, unless you plan to do a large amount of work. You may want to stay away from purchasing homes at auction.
- There can sometimes be title liens or judgments attached to the property. You may buy a home from auction, but get stuck with an old lien or judgment from the previous owner.
Step-by-step on how to buy a house at auction in Philadelphia
The first step consists of finding out when the next auction is taking place in Philadelphia. The sheriff’s office uses a third-party site to showcase upcoming auction properties. You can also obtain a real estate agent to access REO properties listed on Bright MLS.
The second step is obtaining your funds. You will need either cash or a pre-approval to purchase a home from auction. Bid requirements will ask for a deposit on the property along with an offer. Whichever bidder is the highest bidder for the property will win the bid.
The third part will be providing the city with 10% of the purchase price by 5 pm the next day. The purchaser then has up to 15 days to pay the remainder. Typically, it is best to purchase these homes using cash or hard money loans (private lenders).
The fourth and final part would be to make sure you are in touch with a title company. While going through the purchase process, make sure you are doing a title search to check for any liens, judgments, or outstanding bills.
What does occupied auction homes mean?
One of the biggest things to be aware of is occupied homes. You may find yourself purchasing a home with someone still living there. Sometimes, the reason a person might go into foreclosure is because of squatters. In Philadelphia, having squatters is a common occurrence and an ongoing issue. Whether the house was vacant or it has a nonpaying tenant, you may find someone living in the home you purchase. Squatters and nonpaying tenants do have rights in PA. Therefore, you need to ensure you go about handling it the right way or potentially face consequences.
Don’t Bid Blind When Buying a House at Auction
If you have thoughts of buying a home through auction. You should talk with a local expert to learn the best route on how to buy a house at auction. Therefore, an experienced real estate agent could be a great place to start when purchasing a house at auction. They don’t only have access to bank-owned properties. But they also know to ensure you don’t overpay for that foreclosed home. They may factor in the cost of renovation and give expert opinions on what the after-rehab value can be.
When it comes time to buy your first foreclosure home. Make sure you know what type of auction you are buying from. Be aware of all the pros and cons involved with buying a house at auction. Knowing the risk and upside behind buying a foreclosed home. Understand each step of the auction process as well as how to obtain the home. As long as you’re prepared, you can make sure you’re getting the best deals and not getting a home with major issues when you buy a home at auction.