How to Buy at Auction
The steps to buying real estate at auction include familiarizing yourself with the process, knowing the terms of the auction, doing your homework on the asset(s) you wish to buy, setting a limit and sticking to it, making sure you have the financial and emotional resources to buy on a cash “as-is” basis, and having a disposition plan in mind before you buy.
Familiarize Yourself
Do not rush in to the auction process. Take time to attend some auctions. Ask around about which firms are reputable. Familiarize yourself with auction terminology. An excellent source of auction terminology is the National Auctioneers Association website at http://www.auctioneers.org/
Go to different auctions. Deal with auction firms that are open and transparent about their business, who can earn your trust.
- Do they use deceptive terminology such as a published “Minimum Bid” which is a fraction of the seller’s true acceptable price?
- Is it easy to find and contact the principals or senior management from their website?
- Do they post their sale prices after each auction? If not, why not?
Know the Terms
The terms should be posted on the website or in the sale brochure of the auction. Read and familiarize yourself with the specific terms of the auction you are interested in. Read the sales agreement that should be posted before the auction. Be prepared to live with the terms before you ever bid. The terms, although seemingly strict, are necessary to ensure that everyone is bidding from a level playing field.
Do Your Homework
We always urge our bidders, and many times require them, to certify that they have inspected the property before they bid. This should seem obvious, but the fact is when you buy a property that you have not inspected, or checked, such things as access issues, zoning, or utility availability, among other variables, you will be stuck with these problems if you are the winning bidder. Make sure you are aware of these issues, and that the price you bid reflects your comfort level with the property in its “as is” condition.
Set a Limit
We always encourage our bidders to set a limit on what they would pay based upon their knowledge and comfort level with the property, and to stick with it. Yet, in the heat of bidding, when everyone else seems to be enthusiastically bidding the price up above your limit, its sometimes very tempting to go ahead and bid higher. What will you do in this situation? It will come up, so try to be aware of what you may do if the price goes higher than you planned.
Make Sure You Have the Resources
Remember that properties at auction are typically not selling subject to financing. You should therefore have sufficient cash resources or lines of credit necessary to close the sale within the required time period (usually 30 days). Beyond the financial resources,you should make sure you have the emotional resources to be able to put a substantial earnest money deposit at risk, knowing that if you cannot close, you may lose it.
Have an Exit Strategy
Before you buy, you should have a clear investment strategy.
- Are you buying the asset for a long hold, or do you plan to sell it in the near term? Know the local rental/ lease market.
- Is the market headed up or down? Have a clear sense of the how long it takes to market a property conventionally, and what sort of price is attainable in an ordinary, “non-auction” marketing scenario.
Keeping these factors in mind will make your auction purchase a sensible one.
