Tips for Buying at In-Person Auction?

Question

I am wondering if anyone has any tips for buying a property at auction. I have never been to one before (though trying to arrange to go to one and watch before the one I actually want). I am a bit nervous about being outbid, but the auction is a rural property being sold via estate auction, not foreclosure. Any tips about how to value the property, bidding strategies, etc. would be appreciated!

Erik W. · Answer

One of the key things to do is prepare before you go.  This information is general purpose, not specifically for a rural estate auction.

1) Know what the fair market value of the property is today in "as is" condition.  Get inside if at all possible, even if that means crawling thru the unlocked window of a vacant (heavy emphasis on VACANT) property.  You do not want to get shot or charged with trespassing by an upset owner who hasn't vacated the premises yet.  If there's an agent involved, of course go thru them to get a tour if possible.  Otherwise...you have to get creative.  Deduct your estimated repairs, carrying costs, and profit margin requirements to arrive at your maximum bid.

2) Know what kind of title you will receive: Warranty Deed, Quit Claim, Sheriff's Sale Deed, etc.

3) Have insurance lined up so you know you can get a policy on it if you win the bid.

4) Find out if you will pay a Buyer's premium in addition to the total bid.  Factor that into your Step 1 above.

5) Depending on the type of auction it is, some liens may not be wiped out.  IRS / other tax municipal liens and special tax assessments are notoriously "sticky" and usually trump all others, even 1st mortgages.  However, they sometimes won't enforce them and they will drop off after a period of time.  Just be aware you may not be able to get title insurance during that period before any liens fall off or get settled.

The day of the auction, you will need:

1) Certified funds (bank cashier's check, etc) to pay any deposit or winning bid amount percentage.  This is typically 10-20% of the winning bid price.

2) Acceptable form of ID & proof of funds to register as a bidder.

3) Discipline.  Stick to your highest bid.  The whole purpose of an auction is to create a Buyer's frenzy and bid up the price.  The auctioneer is not your friend: he works for the Seller, and his goal is to maximize the Seller's proceed, not get you a "Deal."

There really isn't any one bidding strategy since each auction attracts a different crowd of bidders.  Some folks go in high at the start to try to scare others away.  Others wait for the auctioneer to lower the opening bid price and come in low.  Still others will always outbid you by the smallest possible increment.  At one county tax sale, I saw a guy who was famous for his "....and a dollar!" bidding strategy.  Meaning whatever you bid, he would outbid you by $1 to force you to bid again until he hit his max.  His idea was to make the process as tedious as possible to wear out the competition.  A wise auctioneer will work with the Seller and set minimum bid increments at some amount, maybe $100, $500 or $1000.

Good luck and happy bidding.

Peter Walther · Answer

Monica, your wrote that this is an estate sale, I assume that's a probate estate and not a bankruptcy estate.  In the first, if you win, you may receive a Personal Representative's deed which probably have no to limited warranties.  The recourse for a defect in title i.e. a mortgage or lien against the property, is probably limited to suing the Estate as long as there's something there to recover from.  The point of the estate sale is to raise money to pay claims of creditors and distribute the remainder to heirs and beneficiaries.  In the second you would probably receive a Trustee's Deed which has a similar limitation of warranties.

The bidding information should tell you if the Seller will provide title insurance.  The contract for sale and purchase should be subject to your receipt, at the Seller's cost or yours, of a title commitment prior to closing acceptable to you subject on to governmental zoning, and easements and restriction of record with you receiving a copy of all exceptions during the review period.

This is a big investment your considering making.  It might be a good idea to talk with a good real estate attorney in the area so you can have all your questions answered before the sale.  It will cost some money, but all good education has tuition.  Good luck.

Erik W. · Answer

@Monica Morff, the answer to your question is "definitely maybe."

This is where the TITLE (aka type of deed) comes into play.  If you are getting a Warranty Deed, that is the highest form of deed typically and warrants a clear title that the Seller will pay to defend.  If you get a Special Warranty Deed, that means the Seller promises THEY didn't do anything to encumber the deed during the time the title was in their custody, but something else might have done some prior to them so they will only warrant the deed against any encumbrances since they took control.  Then there are Sheriff's Deeds, Collectors Deeds, Bargain and Sale Deeds, and Quit Claim Deeds...generally in order from more protective toward the Buyer to least protective.  There could be others I have not heard of or dealt with that cover special cases.

It is always your responsibility to do your due diligence and protect your investment, which is why I insist on a title search and title insurance on anything I buy.  Caveat emptor: Buyer beware!  Estate auctions usually are not too tricky if you have a reputable auction house, but you want to be certain that you know what you are getting.  There could also be deed restrictions that go with the property.  You should have a title company run a search on it if the property is of any significant value.  Should turn up any major problems, and then if you win the bid the title company should be willing to issue a title insurance policy.  If they refuse to issue a policy, that means they found something wrong.

Andrew Syrios · Answer

Whatever you do, stick to your strike price. Auctions are all about getting people excited "to win" but you don't win if you buy over market. Discipline is essential!

Monica Morff · Answer

@Tim Herman It is a reserve auction, so I know there is a minimum but it is not being disclosed. We have been contacting many different lenders and submitted applications with a couple (one is a local bank, the other is an agricultural lender) because we were finding that most government-backed lenders were not able to help us. I didnt think about that, how someone could want to buy it because of family nearby...

@Erik Whiting Wow! Thank you for all of the information. We did get to see the property, so that helps a bit. Wouldn't they have to disclose if there is a lien on the property or if taxes are owed? Or is that up to the buyer to do due diligence? I really appreciate all of the information!

Tim Herman · Answer

@Monica Morff Does it say absolute auction? That means it will sell to the highest bidder. If not then they will have a reserve that they won't sell the property until it meets the minimum. In the sale bill, they will say how much earnest money to put down and how long before cash to seller, usually 30 days.  Get your financing in order. Over 20ac you will most likely have to find a bank that carries the mortgage on its books. Hard to put a value on rural properties. I've seen them go higher than they could build new because the neighbors son is coming back to farm and they need another house close to their farm. One tip don't be the first to bid. Wait for the bidding to slow. Good luck.

Tips for Buying at In-Person Auction?

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