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Foreclosure auctions are a go-to strategy for aspiring homeowners who want a house for less than what they’d pay on the broader market. However, participating usually means arriving with access to a lot of cash, as purchasing the home outright after casting a winning bid is often a functional requirement. However, many people wonder if they can figure out how to buy a house at auction without cash. Fortunately, it’s an option. Here’s what you need to do to unlock the door to auction success and buy a house with strategy, not just cash.
How Foreclosure Auctions Work, and Why Most Buyers Use Cash
Foreclosure auctions are relatively straightforward. Bidders arrive at the auction location at the designated time. Then, an available house is presented, and bidders place bids, with the highest bid ultimately being the price that the bidder pays for the home.
The reason most auction home buyers use cash for the purchase is that it’s typically required. Ahead of the start of the auction, buyers have to prequalify. Essentially, they’ll need to show that they already have access to the funds they’d need to pay for the house before they’re allowed to bid. Usually, they’ll also need to provide a credit card to cover any earnest money. Once they prequalify, they’re eligible to participate.
Typically, the process for paying for a winning bid involves getting a cashier’s check for the amount bid to cover what’s owed. Cashier’s checks are functionally cash, as you can’t get one for a dollar amount above what’s in your bank account. However, they’re more secure and convenient than using actual bills.
Precisely when that payment is owed varies depending on a person’s location. You may have a few days or several weeks to settle out the balance. Since it’s not standardized across every part of the country, it’s critical to review the requirements before participating in an auction.
How to Buy a House at Auction Without Cash
The trick with buying a house at auction is you essentially have to get access to cash if you don’t have it available. You can’t use a home loan to buy a house at auction. However, that doesn’t mean there aren’t ways to technically finance the purchase. Here are some options.
Hard Money Loans
Hard money loans are lending products that are typically only used to buy specific types of assets, real estate being one of them. While a hard money lender may check a borrower’s credit score, they aren’t as concerned with it as they are with the ability to repay. Additionally, these are secured loans, so there’s an underlying asset supporting the loan.
In many cases, hard money loans come with incredibly high interest rates and shorter repayment periods than mortgages, with the full amount often due within six to 12 months. However, the lenders can usually fund the loans within days, allowing you to access the cash you need within the timeframe required to satisfy the rules of the auction. Just be aware that down payments are usually necessary, so you’ll need access to some cash to go this route.
P2P Loans
In some cases, you may be able to secure a peer-to-peer (P2P) loan ahead of an auction to get enough cash to buy a house through the auction process. Interest rates and similar details do vary by platform, so some may come with terms that aren’t unlike hard money loans. Additionally, P2P lending usually doesn’t guarantee the loans will fund, but individuals that are funded can typically receive the cash within a few days instead of weeks.
Home Equity Loans
If you already own a house, you could potentially use a home equity loan to secure enough money to purchase another property at auction. Usually, the interest rates are lower than the alternatives above, but the review and funding process can take weeks to complete. However, the repayment terms are usually longer, which can work in your favor.
Personal Loans
Personal loans are a flexible option with a moderate to higher interest rate and repayment terms that usually fall in the three-to-five-year range. Many of them are unsecured, so that may limit the total amount you can borrow. However, you can potentially use the money on anything, including purchasing a property at auction. Additionally, they’ll fund faster than a home equity loan, though it may take a bit longer than a hard money or P2P loan, depending on the financer involved.
Can You Get a Mortgage on a Home Bought at Auction?
While you do have to pay cash for a house purchased through an auction, you do have the option to get that cash back by doing a cash-out mortgage. In some cases, you can even arrange for these through a lender in advance. Then, after you formally buy the house, you work with the lender to secure the mortgage, and the lender gives you cash based on the value of the mortgage. After that, you’re obligated to repay the mortgage just as you would if you didn’t initially support the purchase with cash.
Many people use this strategy for auction house purchases with high interest rates. For example, if you used a hard money loan, you can use the cashed-out equity to pay that off, leaving you with a lower-rate mortgage to handle instead.
Just be aware that using a cash-out mortgage means the house needs to qualify for the loan. For instance, the home has to meet habitability standards (unless you’re using a rehab loan) and will undergo an appraisal. As a result, you need to factor in how the process unfolds to ensure you buy a home at auction that will qualify for a loan based on the lender’s criteria. Otherwise, the mortgage might not get funded.
Is Buying a House at Auction Smart?
Buying a house through an auction could mean paying far less than the going rate for real estate in your area. However, there are risks. Typically, you don’t have a chance to tour the house, conduct an appraisal, or complete an inspection before you commit. Additionally, you agree to take the home as-is. As a result, there’s a chance there are issues with the property that you won’t become aware of until you complete the purchase, and that could leave you on the hook for substantial repair bills.
Another potential risk is the presence of certain liens. With a traditional home purchase – such as using a conventional mortgage to fund it – part of the process usually involves checking for any liens against the property. With an auction, there’s a chance there’s a lingering lien, and if there is, you’re responsible for it if you purchase the house during the auction. That could lead to hundreds if not thousands of unexpected dollars you’ll need to spend.
An auction also isn’t controlled by typical housing rates in your area. While that can mean getting a deal, there are also no controls in place to prevent you from overpaying. Usually, that’s the function of the appraisal during a more traditional home purchase process, as the appraisal lets you know the current market value of the house. If you want to avoid overpaying, ample research before the auction is essential, as well as avoiding getting caught up in the moment and overbidding.
Further, even if you place a winning bid at an auction, you might not get to buy the house. Some auction properties have reserve prices, which is the minimum amount the seller will accept. If the reserve isn’t met, the home isn’t sold, even if there was a legitimate bid.
In some cases, there can be other risks, too. As a result, it’s critical to look into the potential drawbacks of buying a property at auction in advance. That way, you can make sure that you’re comfortable with what may occur before you buy a house through an auction.
Do you have any more tips that can help someone figure out how to buy a house at auction without cash? Have you purchased a home at auction and want to share insights about the process and whether it was a worthwhile path toward homeownership? Share your thoughts in the comments below.
Read More:
- 6 Things to Do After Buying Your First House
- How to Navigate the Process of Buying a House
- Buy a House in These States and Student Debt Is Forgiven
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is a former AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.
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