Buying a house at auction

There are several things to remember if you participate in an auction:

* MORTGAGE PRE-APPROVAL IS IMPERATIVE.

There is no such thing as a “financing contingency.” In most real estate auctions, a bidder will have to have certified funds of $3,000 to $5,000 as an initial down payment to participate. If a bid is successful, the bidder will be required to deposit a 5 percent down payment in 10 days and settle on the property within a month. Failure to settle may mean loss of down payment.

Any serious participant will be “pre-approved” for a loan before bidding, not only to determine the highest bid he can offer, but also to protect his down payment. There would be nothing worse than being the successful bidder only to find out that you had overbid your capacity to obtain financing.

* AUCTION PROPERTY USUALLY DOES NOT CARRY A WARRANTY.

Property at auction usually is sold “as is, where is” and carries no warranties or guaranties expressed or implied. This makes it important for buyers to preview properties that they may be interested in to determine the condition of the property. It is normally a good idea to buy a warranty to protect all major systems.

* USE A FULL-TIME REAL ESTATE AGENT.

Sellers who put their homes at auction include a sales commission in the “reserve price.” A reserve price is the minimum price the seller will accept; this usually is 25 to 30 percent less than the property is listed for.

Sellers usually place properties at auction because of the 30-day settlement and the elimination of “contingent” contracts. Although the reserve price may start at 70 percent of list price, the property usually sells for more as bidders compete against each other. Not only is beauty in the eye of the beholder, so is price.

* THE BID PRICE IS NOT THE FINAL PRICE.

The bid price is for the property as if you were paying cash and does not include closing costs or the 3 percent “buyer’s reserve.” The buyer’s reserve is the way the auction company is paid for its services.

Closing costs can add 3 to 5 percent, and the buyer’s reserve usually is 3 to 5 percent of the bid price. This is another reason that buyers should get pre-approved and make sure that these costs can be included in the financing.

* CONSIDER “NO POINT” LOANS TO KEEP COSTS DOWN.

Once again, it does no good to be a successful bidder and then have to come up with a ton of cash to settle on the property.

Let’s say your bid of $100,000 is successful. Closing costs will add 3 to 5 percent, not including points; the buyer’s reserve will add 3 percent.

To keep your out-of-pocket costs down and your mortgage low, consider a “no point” loan. Points are prepaid interest and are used to lower the interest rate on the loan. If you are able to finance the closing costs and buyer’s reserve, this will add at least 6 percent to your successful bid price.

So let’s say that your final amount is $106,000. If a 30-year fixed loan is going for 9 percent with two points (this is 2 percent of $106,000) or an additional $2,120 out of pocket, the monthly principal and interest at 9 percent would be $846.55 ($106,000 x 9 percent). The same 30-year loan at no points would be 9.25 percent or a monthly principal-and-interest payment of $865.36 without having to pay the $2,120.

The difference in monthly payment is only $18.81, about 63 cents a day, but this saves you $2,120 at settlement.

Auctions can be fun and profitable for both buyers and sellers. The best advice I can give a potential bidder is to get pre-approved for the loan and use a full-time real estate austin texas agent who can help with the process. Also don’t scratch your head or wave at a friend – you may buy a home.

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