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Are Auction Homes worth it?

Once in a while, you may see a home listed for sale at a ridiculously low price of $1. Yes, a dollar. Almost always, this indicates that the house is being sold under auction terms. Some times a different house may be identified as going under auction, with a higher price. Either way, auctions can be a good way to purchase a house, if you have the resources.

How can one finance an auction home?

Often a home under auction won't qualify for traditional financing. This is because the house probably won't appraisal and underwriting requirements for health and safety. In these cases, the homes would have to be purchased in cash.

Also, many of these homes will require what's known as a "buyer's premium" of 4% or 5% or some other percentage. if we use an example of 5%, this is added to the final bid price and covers the costs of performing the auction. So in the case of a final bid amount of $100,000, you'll pay an additional $5000. 

What about Inspections?

As far as inspections go, most auction homes are not available to have an inspection. They usually have language directing you to do your due diligence before making an offer on the house. This is because they don't want the home sale to fall apart for any reason. In this case, you should inspect the home while you are viewing it. This can happen during the public open house times, or during a scheduled appointment.

Note that you normally would be paying for the inspection ahead of time without knowing if you will win the auction.

How about commissions?

Many times the terms of an auction will pay up to a maximum percentage of a broker commission. This amount is usually less than what the broker or agent is expecting to make on the sale of a property. In this case, you may have to cover the difference between what the auction pays, and the amount due for the broker commission, as spelled out on the representation contract.

Usually the auction house also adds what's called a "buyers premium" to the final sales price of the house. This is their overhead that they add.

Earnest Money?

Most of the time, earnest money is non-refundable if the property doesn't close. What this means is that if you make an offer on a property, and win, if you back out for any reason, they try to retain the earnest money.

Conclusion

If the price is right, auction homes can be a great deal. But there are things to watch for in the process of purchasing one of these homes.

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Steven Hong - RE/MAX Results 
REALTOR, e-PRO, GREEN, Old Home Certified 
7700 France Ave S #230, Edina, MN, 55435 
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952-915-2252 (office)
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