5 Financing Essentials for Buying Property at a Real Estate Auction

Pandemic-related mortgage bailouts are ending, and foreclosures are now rising. Foreclosure stats jumped 32% in the third quarter of this year from the second quarter and were 67% higher than the third quarter of 2020. With foreclosures flooding the market, it’s “standing room only” at real estate auction sales these days. Those properties are selling below the average sales price of properties not in foreclosure. These numbers are bringing buyers and investors to real estate auctions in search of the next great deal. For those who are new to the auction block, there are a few key pieces of financing knowledge that are “must-haves” to remember before lifting that paddle to bid:

1. Most real estate auction contracts have no financing contingencies. In a nutshell, “no contingencies” means that you have to secure funds or financing prior to the auction. A prospective buyer must be sure of their ability to purchase the property being bid upon. Refunds are almost never given on bid deposits due to lack of financing.
2. You must be pre-approved (not pre-qualified) for a loan. A pre-approval requires more documented information on the part of the prospective buyer and presents a thorough financial background of the buyer to the seller. You can obtain a pre-approval simply by filling out an application with a bank or other financial institution. Be sure to have all your required paperwork in order and ready to go.
3. When applying for financing, request the highest amount you would be willing to spend on the property, and then some. Do your homework on the property. Develop a realistic dollar amount that the property is worth and what you are willing and able to afford. Take into account the potential competing bids that you may encounter, plus additional fees and closing costs. Also be aware of the buyer’s premium, which is fully disclosed by the auction company – a percentage added to the high bid that goes to the auction company, usually between 5 and 10 percent. Once you come up with that number, that’s the one you put on the financing application.
4. Bring 5-10% earnest money of the possible purchase price. Your deposit must be given in the form of cash, certified check, or cashier’s check. Generally, credit cards are not accepted at real estate auctions so have your deposit money ready. This is standard with all real estate auctions.? The earnest money — aka deposit — is usually pre-determined at live on-site auctions. If you are indeed the high bidder, you typically have to fund your deposit to a full 10 percent of the purchase price within three days of the auction date. Online auctions are a bit different, where in some cases your credit card is charged for authentication.
5. Closings are almost always within 30-45 days. One of the draws for some buyers at real estate auctions is the quick, no-nonsense closing time. And don’t count on the closing being canceled or postponed — it almost never happens. So again, secured financing is essential. Have everything locked in place to meet that fast-approaching closing date. One glitch to hold up the money and you can lose your deposit. There’s no room for error at the auction block.

All that being said, real estate auctions are a lucrative opportunity to purchase a property of value at a great price. Arm yourself with the necessary information, and money, and you can possibly bid yourself into a premium asset.