Buying a property at auction can be very exciting, but if you’re just starting out as a real estate investor you might have a lot of questions about how it all works. When should you start bidding? Why is the bid going up by a certain amount each time? What happens if you get out bid at the last minute?
Understanding the bidding process — and what you need to prepare ahead of time — is key to having a smooth experience when the auction opens up for any property you’re interested in.
Setting your auction budget
Going into an auction with a plan is the key. Before the auction ever begins, it’s a must to do thorough research so that you can thoughtfully craft a strategy that will work with your budget and your overall real estate investment goals.
That’s where due diligence comes in. Due diligence is the must-have research that you should do for any property you’re interested in so that you know all the necessary information ahead of your bid. Once bidding opens and you’re in the heat of the moment, you don’t want to encounter any surprises on the property if you find yourself the high bidder!
Make sure that you factor in all additional costs or fees into your total budget. This could include buyer’s premiums (typically the greater of 5% of the winning bid or $2,500 dollars) or your earnest money deposit (usually 3% of the total purchase price or a minimum of $3,000).
If you are the high bidder on an auction property, you will also be responsible for any liens or other holds that might be on the property. So make sure to review the title and any other documents available for the property and work those into your budget if necessary.
You should also account for estimated closing costs and potential repairs or upgrades in your maximum budget for a property. Clear limits on your budget help prevent overbidding, which can be easy to do when you’re caught up in an auction.
Checking out similar properties in the area is another great way to gather information that will help you craft your minimum and maximum bids. If you know what other comparable properties are selling or renting for, then you can use those numbers to help formulate your overall budget, bidding plans, and end goals for a property of interest.
Understanding how bids work
Knowing how much you’re willing to bid on a property is essential — that’s called your maximum bid. Without a solid maximum bid in mind, you might find yourself getting caught up in the auction and blowing past the top end of your budget before you’ve even covered additional things like fees and closing costs.
An auction may or may not have a reserve price, which is the minimum price the seller is willing to accept for a property in an auction. The seller is not required to share this amount with buyers, so you may not know what that minimum may be. But if the reserve is not met, sellers will still review the highest bid, which they may accept, decline, or send back a counteroffer.
The minimum bid is the lowest amount that you can submit as a bid on a property. You may see a starting bid on an auction that hasn’t begun yet, which is the lowest amount that can be bid to start the auction. If you want to start bidding on an auction already in progress, you’ll see a current bid plus a bid increment — those two numbers added together are the minimum amount that you can bid.
A bid increment is the minimum amount a bid must increase during an auction, usually a percentage of the seller’s reserve price. Here’s an example of how bid increments work:
Let’s say that bidding begins for a property at $20,000 and someone bids that amount. The next minimum bid amount that appears is $22,500. That means the current bid increment is $2,500. You decide to bid that amount, making the new amount available to bid $25,000, which is another increment increase of $2,500.
When you’re in the bidding process, you can go back and forth bidding in increments, or you can also submit your best and final bid — that would be the maximum amount you are willing to bid, as long as it is higher than the current bid amount.
Going beyond the bid
During the auction, don’t let the excitement of the bidding process override your strategy. Pay close attention to the clock, especially in the final moments. If you’re outbid in the last 5 minutes, the auction will extend 5 extra minutes so you can counteroffer.
Staying alert and engaged throughout the process pays off, even if you get outbid. If the winning bidder fails to complete the purchase, then you may be approached at the auctioneer’s discretion as the second highest bidder, or backup bidder, to present your high bid to the seller.
Properties may also go through multiple auctions before they are finally sold, so don’t despair. You may have another chance to bid on a property you like in another auction!
With the right bidding strategy and budget, you can bid confidently on your first — or next — auction property. Be prepared, stay focused, and don’t forget to enjoy the process!
Ready to try bidding on your first auction? Visit Xome today and browse available auctions to find your perfect investment property!
Real estate investing involves risks. Results may vary.