Think all homes sold at auction are dilapidated foreclosures you have to pay cash for on the spot? Think again. Real estate auctions are becoming more and more popular because they offer good deals on a variety of properties in a consumer-friendly environment. Nevertheless, plenty of myths surrounding the process abound. Here are some of the most popular misconceptions about real estate auctions and the facts behind them.
Myth 1: All homes at real estate auctions are foreclosures and/or distressed properties.
Some are and some aren't. Either way, potential buyers have ample opportunity to determine a property's history and condition before the auction. More and more homes at auction today are brand new homes that builders are unloading. Some are even luxury homes. "People think there is something wrong with the home if it is in an auction, but I've sold many homes that are in move-in condition," says Tim Gray of The Chicagoland Real Estate Auction.
Myth 2: If I buy a home at auction, I must buy it sight-unseen, without an inspection.
Most auction houses hold open houses before the auction date. Buyers are invited to bring a contractor or inspector with them. However, judicial auctions or Sheriff's sales (properties auctioned off by your county) typically do not offer a chance to inspect the inside of the home before bidding. If no access is granted to a home, or it is obviously in poor condition, that is reflected in the price.
Myth 3: Buying a home "as-is" is full of risk.
It is true that auctioned homes are almost always sold as-is, with no contingencies and no attorney review period. However, a good auction house will have inspection reports available beforehand for each property it is selling. Some even offer home warrantees. "We put together a complete due diligence package including a home inspection, a survey of the property, so bidders have all the facts," says Michael Fine of Fine & Co., a Chicago auction house. "We encourage them to take the contract to the attorney before the auction."
Myth 4: Buyers must pay in full with cash at real estate auctions.
Buyers must bring a deposit, usually about 5-10 percent, which is treated like earnest money. Buyers typically have 30-45 days to secure financing and close. If not, they forfeit their deposit. One exception is a judicial auction or "Sheriff's sale." These auctions typically require the entire purchase price payable at the auction or shortly thereafter.
Myth 5: Buying a home at auction is "taking advantage of another's misfortune."
Occupied homes, as opposed to empty ones, improve the economy and the community. "Our auctions help fuel the economy, because when there is a house sitting vacant, there is no one paying the mortgage or the property tax, or utility bills. There is nobody hiring tradespeople or shopping at the local stores for household items. When we sell that property, someone purchases it and someone starts doing all those things," says Rick Weinberg of REDC, a national auction firm.
Myth 6: Only experienced investors can really compete at real estate auctions.
Auctions are open to the public. Because of the popularity of auctions today, and the proliferation of residential estate auctions in areas like Chicago, many attendees are everyday homeowners. "Our typical customer has never been at a live real estate auction before," says Fine. "The buyer at these events is not some large investor, it's John Q. Public. So you're competing against someone just like yourself."
Myth 7: If I sell my home at auction, it will cost me a lot more in commission than if I hire a Realtor.
Auctioneers say the cost is comparable, usually slightly more. However, auctioneers say the seller saves money in the long run. "The inherent efficiency in the auction process enables the seller to eliminate long-term carrying costs including maintenance and taxes," says Rick Levin of Rick Levin & Associates in Chicago.
Myth 8: If I sell my home at auction, I will get a lower price than market value.
Auctioneers believe an auction is the best way to determine the true market value of a property, particularly when comparables are scarce. "When you group 20 people in a room, and they're all bidding on the same property at the same time, you get true market value," says Brian Kuzdas of RealEstateAuctions.com.
Myth 9: There is no place for Realtors or brokers in real estate auctions.
Many auction houses pay commission to a Realtor who brings a client to an auction after that client wins the property.
Myth 10: If I can't make it to the auction, I'll lose the opportunity to bid.