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Once a property is scheduled to go to auction, it’s a fair assumption that the seller is a “motivated seller.” The seller wishes to dispose of the property quickly and effectively. Also, the seller has chosen to sell a home at auction or is required by law.
This can also represent an opportunity for the buyer to acquire a particular property, hopefully at an attractive price, so it seems like a “win-win” situation.
But not everyone is familiar with the auction process, so let’s look at some of the key advantages and disadvantages of buying a home at auction.
Pros of Buying a Home at Auction
On the positive side:
- Properties that go to the auction may be foreclosed properties or properties that the vendor has to sell. Therefore, they may be sold at a discount to the market price. Many are offered with a reserve or minimum price, thereby providing great opportunities to buy relatively cheaply;
- A fixed bidding period with a precise end date and time is fixed for sale. This eliminates the possibility of sellers keeping properties on the market and waiting for improvement in prices or even better offers;
- The transaction for a house bought at auction can be completed very quickly, often within 28-days. This is because most of the predefined terms have been set by the seller and the auction company, meaning there are few terms to be resolved after the selected bid is announced;
- On the auction day, you can see all the other bidders in the room. You can weigh up your competition! There may be lots of people interested in the property you like, there may be few, so you can judge your offer accordingly;
- Some very desirable properties are often listed at auction, including foreclosed homes. Owner-occupiers have a chance to buy below market price, while investors can secure an attractive investment.
Cons to Buying a House at Auction
On the other hand, there are some disadvantages to buying a property at auction, and these include:
- Many auctions are cash-only sales. Although arranging finance for some purchases is possible, it will have to be done in the period allowed for pre-auction. Also, if you make a winning bid at an auction, you’ll have to pay a deposit or down payment on the day and will only have a limited number of days to pay the balance of the total purchase price;
- there is a lot of pressure on getting appropriate due diligence sorted out as there is only a relatively short window to arrange surveys and to check the legal issues relating to any property of interest;
- Homes being auctioned are often sold “as-is,” and the complete condition may not be apparent. This is because it’s not always possible to inspect or preview a home during a pre-auction open period. Accordingly, it’s wise to set aside funds for repairs and renovations;
- For distressed properties, in particular, auction companies may not be able to guarantee a clear title. If any subsequent issues arise concerning title, the buyer will be responsible for paying for items such as outstanding tax liens or unpaid utility bills; and, finally:
- If someone outbids you or the price rises quickly above your budget, any initial expenses incurred by surveys, contractors, or legal fees will be lost. Sometimes the emotion and excitement of the auction make people bid above their budget, making what seems like a below-market value deal cost much more!