In terms of financing, buying real estate at auction is very similar to buying the traditional way. A
potential buyer has several options available.
Auction Terms or Bank Terms
Auction Terms or Bank Terms -
Real estate auctions are one way to obtain financing through a bank on a piece of property,
regardless of your credit history. With this option, the auction company will often have an
arrangement with a cooperating bank, who will fund the loan on the property to anyone regardless
of their credit, as long as they have the agreed-upon down payment available up front. The manner
of the down payment varies greatly, ranging from a percentage of the final purchase price to a flat
fee of some pre-determined amount. Either way, as long as you have this amount on the day of the
sale, the bank will give you the loan. Interest, payments, and repayment terms will all have been
spelled out in writing for any interested parties prior to sale day, and will be included in any
promotional materials delivered to pre-registered bidders.
Mortgage or Deed of Trust
Just like with traditional real estate purchases, you can opt to obtain financing through your
own bank of choice. All arrangements need to be made way in advance of auction day, because
purchase contracts for auctions are generally not contingent on the buyer being able to obtain
financing. If you win the bid, you will be expected to pay for it at closing in 30 to 60 days. Failing in
this obligation because you were not able to obtain financing will result in losing your down
payment, which can often be several thousand and even tens of thousands of dollars! So you can
see the importance of having any traditional financing in order ahead of time; then there is no
question as to your ability to pay if you win the auction.
Ability to obtain traditional financing will relate to the strength of your credit history, and
something called the loan-to-value ratio. A typical conservative LTV is 80%/20%, which means the
bank will provide a loan in an amount no greater than 80% of the appraised value of the property.
The buyer is expected to come up with the other 20%. This can be in the form of cash saved up for
the purpose, or in the form of a second mortgage covering just that portion not financed by the
primary lender. Narrower LTV’s, such as 90/10, are seen, but typically are offered only for buyers
with exceptionally strong credit and loan histories.
You will also want to have your outside financing handled in advance so that the bank can
cut you a check for any deposits required on sale day, unless you plan to pay them in cash.
NOTE: The term “cash” in real estate sales denotes money that was not borrowed, in other words you earned it yourself
without an obligation to pay it back, such as a salary, wage, bonus, profit, etc. It does not refer to an exchange of actual
paper dollar bills. Paying for real estate “in cash” is done by writing a personal or cashier’s check. In fact, perhaps the term
ought to be changed to “paying in check.”
Cash
On that note, the obvious alternative to financing the purchase of real estate through
auction is to pay cash (er, check) for the property. If you are in a financial position to do this (for
example, after the recent sale of a previous home) it can be an emotionally and psychologically
rewarding thing to do.
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