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Understanding Real Estate Auctions

Are you considering a real estate purchase through an auction via an online website like Zillow and found a listing that seems too good to be true? 

It’s not uncommon for would-be buyers to encounter listings online with a captivating opening bid of just $7,500 for a home or $500 for a lot, or some other low starting number. However, understanding the nuances of real estate auctions can help set realistic expectations and lead to successful bids.

Real Estate Auctions Can Be Tricky

Online auctions are sometimes used as a marketing approach to generate interest in a property that has issues like being in very poor condition or unable to get traditional financing. The final sales price is often anywhere from 5 to 20 times higher than the advertised initial bid.

Most auction sales require a cash buyer, and no opportunity to complete due diligence like a home inspection or survey. The utilities are often turned off in most of these homes so you can’t even evaluate the major appliances and systems. Properties are generally sold As-Is, with claims the seller does not have any information to share and no property disclosure on the property.

In Georgia, a seller is legally obligated to disclose any known latent defects with a property they sell. In sales where the seller claims no knowledge of the property, it can sometimes mean the seller is flipping a property they have never seen or inspected themselves. This is a very risky purchase. So buyers should beware and understand the risks they are taking. 

The Starting Bid Mirage 

The initial price you see, such as the $7,500 figure, might look like a steal, but it often serves as a starting bid or reserve price that’s set quite low to attract interest. Realistically, the final purchase price can be significantly higher and will be consistent with local market values.

Sometimes buyers feel cheated in these situations because it seems like false advertising. Online auctions have fine print details with terms and conditions, like a minimum sales price that is much higher than the $7500 initial bid required. For example, a $7500 initial bid may require a price of $50,000 as a minimum sales price. And typically a home like this will ultimately sell for $100,000 to $130,000 or even more due to competing buyers bidding higher. 

Auctions Compared To Traditional Listings 

Auction properties often aren’t listed on the local Multiple Listing Service (MLS), and the rules are different from traditional real estate sales. Auctions move quickly and are legally binding; therefore, understanding the terms and conditions is crucial.

What to Do Before Bidding

  1. Research thoroughly into the property listing and understand the auction terms.
  2. Inspect the property, when possible, to assess its condition and value.
  3. Do research to find out if the property is stigmatized, like the site of criminal activity like drug manufacturing, or a homicide, or significant vandalism, like copper plumbing and HVAC systems removed.  
  4. Determine the actual market value and your maximum bid prior to making an offer/bid.
  5. Be prepared to pay cash or get a higher interest rate “hard money” loan. Only in rare cases does the seller allow a buyer to get traditional financing on an auction property. 

Contacting the Listing Agent

If you come across such an auction listing and need more information, it’s often best to contact the listing broker who is handling the auction directly. 

You can find the listing agent one of two ways:

  • If the listing is on a public site like Zillow, scroll down until you find the name of the Listing Broker. 
  • Or you can drive by the property and call the listing broker on the sign. 

If you have an existing Buyer Brokerage Agreement, contact your agent when you are ready to place a bid. Be prepared to provide proof of funds like a bank statement showing you have cash to pay a more realistic price

How to Buy without the Risks of an Auction

We will gladly provide the knowledge, resources, negotiation, and research to find the best deals and off-market properties available, including an auction property if that best fits your goals. Learn more about our Path & Post Buyer Broker Services at pathpost.com/buy.

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