Every so often, an auction property pops up in the Kansas City MLS at a price that immediately gets buyers’ attention. A home that looks like it should sell for $400,000 might suddenly appear online at $200,000 or $225,000, and inevitably someone sends it to me and says, “Ron, have you seen this house? This is the deal of the century!” Unfortunately, that number usually does not mean what buyers think it means. With many auction properties, the advertised price is simply a starting point for the bidding, not an indication of what the seller expects to accept.
That is a very different process from a traditional home sale, where the list price is generally intended to be somewhere reasonably close to the seller’s expectations. Auction pricing is designed to attract attention, encourage participation, and get multiple buyers competing against one another. In other words, the low number that caught your eye may be doing exactly what it was intended to do: get you interested enough to start bidding.
The Price You Bid May Not Be the Price You Pay
Another important detail buyers sometimes overlook is the buyer’s premium. Depending on the auction terms, an additional percentage may be added to your winning bid to determine your actual purchase price. If the buyer’s premium is 10%, for example, a winning bid of $400,000 could mean an actual purchase price of $440,000. That changes the math pretty quickly, and it is one of those details buyers need to understand before deciding whether they have really found a bargain.
And yes, I know what many buyers are probably thinking: I’m paying another $40,000 for what? The buyer’s premium is part of the auction company’s compensation structure. There is nothing inherently wrong with that if everyone understands the terms going in, but it absolutely needs to be included when comparing the final cost of an auction property to a traditional home purchase.
The Inspection Problem
The inspection process is probably my biggest concern for the typical homebuyer. In a normal Kansas City home purchase, we can usually make an offer with an inspection contingency, get the home under contract, and then hire professionals to inspect it. If we discover major foundation problems, termites, sewer issues, electrical concerns, or some other expensive surprise, we generally have options during the inspection period. Auction properties can work very differently because buyers may be expected to complete their inspections and due diligence before bidding, with the eventual purchase made without a traditional inspection contingency.
Think about what that means. You could spend $500, $700, or more inspecting a house, perhaps add a sewer scope, structural evaluation, or other specialized inspection, and then get outbid during the auction. At that point, you have spent a significant amount of money learning everything there is to know about a home someone else is going to buy. Congratulations—you just purchased a very thorough inspection report for somebody else’s house, which is not exactly my favorite home-buying strategy.
“As Is” Deserves Your Full Attention
Auction properties are also commonly sold as is, so the buyer needs to be comfortable with the condition of the property before placing a bid. Depending on the particular terms, there may also be fewer protections involving financing or other contingencies that buyers are accustomed to having in a traditional real estate transaction. That can create additional risk for someone who is relying on a mortgage, selling another home, or simply wants the normal protections most families expect when purchasing a house.
None of this means that buying a home at auction is always a bad idea. An experienced investor, contractor, cash buyer, or someone who thoroughly understands the process and is comfortable taking on additional risk may find an auction property that makes sense. But that is very different from the typical family looking for its next home and assuming the unbelievably low price appearing online is simply a great bargain waiting to be discovered.
Don’t Let the Low Price Fool You
So when an auction home suddenly appears in your search at a price that looks almost too good to be true, remember that the number you see may have very little to do with what the house will ultimately cost. By the time competitive bidding is finished, the buyer’s premium is added, inspections have been paid for in advance, and you have accepted the risks associated with an as-is purchase and fewer contingencies, that “deal of the century” may not look like much of a deal at all.
That is why whenever one of my buyers sends me one of these listings and says, “Look how cheap this house is!” my response is usually pretty simple: Keep reading.