Have you seen the show Flip or Flop on HGTV? A husband and wife real estate team in California purchases homes at auctions with cash in order to renovate and resell them. We recently had a client who was interested in how real estate auctions work, and if they were a smart investment for her.
Home auctions and renovations produce high drama – they make for a good TV show, but are certainly a risky investment. Here are four risks you take when purchasing a home at auction:
Risk #1 – 10% Earnest Money
If you buy real estate at auction, you have to put 10% down and that is absolutely nonrefundable for any reason. You are committed from contract.
Risk #2 – No Inspections
All your inspections must be completed prior to bidding. You can’t really inspect the property before contract because usually the utilities are not on, and you are not guaranteed to win the bid. If you are buying with a loan, it is worse: no appraisal or loan contingency (and, you have to use the auction house’s lender).
Risk #3 – 5% Auction Fee
On top of your purchase price, they add a 5% auction fee. The auction house charges 5% premium and often an additional “technology fee” ($300 to $1000) for holding the auction to the buyer (in addition to whatever they charge the seller).
Risk #4 – Advantage to the Seller Continue reading