Series: Understanding Auction Financials
Part 1 of 3
Buyers often assume that auction sales are required to be full, cash-only purchases. However, the belief that all auction sales are financed via cash is a myth. It is important to understand that buyers have options in regards to how they fund their purchase in most transactions.
The terms of every sale may vary, but typically buyers are required to post an earnest money deposit the day of the auction. Sellers are looking to sell their property to a ready, willing, and able buyer. Buyers post a deposit to show that their offer to purchase the property is made in good faith. The amount may vary, but it is usually a fixed advertised amount or a percentage of the purchase price.
The deposit is required to be tendered via certified funds – cash, cashier’s check, or a wire transfer. This means the auctioneer is unable to accept personal checks, business checks, credit cards, debit cards, and mobile payment services (e.g. Zelle, Venmo, etc).
Be sure to review the terms of the sale prior to the auction so you can be fully informed about the deposit requirements. Some sales may require an advanced registration and stipulate certain requirements. At on-site auctions, buyers should be prepared to verify that they have the deposit with them at the premises prior to budding. Online auctions typically require that the deposit be tendered within 24 hours of winning the auction. However, it is important to emphasize that every sale can have their own unique set of terms and conditions.
Exploring Financing Options
Although the deposit is required to be an on-hand asset (i.e. cash), it is often possible for the remainder of the purchase price to be funded from other asset types. Options may vary from various lines of credit to loans. You can learn more about some of these options here (insert link here).
While financing options may be available, it is important for buyers to understand that they need to perform their due diligence before participating in an auction or engaging in a contract of sale. Although auctions are a lucrative method of acquiring real estate, traditional forms of financing may not be available or suitable for every purchase. While sellers sell properties for a variety of reasons and there isn’t one standard rule of thumb that can be applied to all auction sales, it isn’t uncommon for auction sales to not qualify for conventional forms of financing due to different constraints – time, access, etc. You can learn more about some of those constraints here (insert link here).
If you are financing a purchase, it is prudent to get pre-approved before submitting a legally binding bid or engaging in a contract of sale. Let your lender know that you are thinking about purchasing a property at public auction in as-is condition. In most scenarios, the auctioneer will not request a pre-approval letter because the contract of sale will not usually include a financing contingency. However, it is wise for you, the buyer, to know where you stand with a loan before taking any auction that may bind you to the acquisition of a property. As a friendly reminder, please remember that the underwriting of any loan is subject to your their underwriter’s guidelines. If there is a hiccup that may stall your loan’s final approval, you will want to have a backup plan.
- Earnest Money Deposits (EMDs) are required to be tendered via certified funds.
- Prior to bidding, buyers should have the advertised earnest money deposit (EMD) available in a liquid asset (e.g. cash).
- Although auction sales tend to be cash buyers, it is not usually a condition of the sale. Buyers usually have 30-45 days for settlement, so financing is an option that buyers may be able to consider.
- Since most auctions don’t include financing contingencies, buyers should perform their due diligence and seek pre-approval.
- Change happens. Always be prepared with a backup plan.