How To Buy A House At Auction Without Cash

David stood on the steps of the courthouse, watching as the auctioneer rattled off numbers faster than he could follow. His heart raced. He had spent weeks researching how to buy a house at auction but didn’t have the luxury of bringing a full cash payment. Yet here he was, determined to secure his first investment property in one of the hottest real estate markets in the country. David knew that most people think buying a house at auction requires a suitcase full of cash, but he’d done his homework. He had a plan that involved securing financing—and now, with the gavel about to fall, he was about to see if it would work.

David’s situation isn’t unique. Thousands of homes are sold yearly at auctions, allowing buyers to score properties below market prices. While many buyers think that these deals are only available to cash buyers, the truth is that it’s possible to buy a how to buy a house at auction without cash without cash in hand. In this article, we’ll explore how to finance an auction property, the steps involved, and what you need to know before jumping into the auction market.

The Appeal of Buying a House at Auction

Buying a house at auction offers some unique benefits. Properties at auction are often sold at a discount, mainly if they are foreclosures, tax lien sales, or properties that need substantial repairs. Auctions can be an excellent opportunity for investors looking to flip a home, landlords expanding their rental portfolio, or even first-time buyers looking for a bargain.

According to a report by Auction.com, auction sales increased by 24% in 2022 as more homeowners faced foreclosure and investors sought distressed properties. While auction prices can sometimes rise to market levels due to competitive bidding, many homes still sell for 10-20% below market value, according to ATTOM Data Solutions.

However, one of the most common misconceptions is that you must have the total purchase price in cash to buy a how to buy a house at auction without cash While it’s true that cash buyers are often preferred because they can close quickly, financing options do exist—and with the proper preparation, it’s possible to purchase a house at auction without cash successfully.

Step 1: Understand the Auction Process

Before you can think about financing, it’s essential to understand how property auctions work. There are two main types of auctions where properties are sold:

Foreclosure auctions: A county’s sheriff or trustee often holds these after a homeowner defaults on their mortgage. The property is sold to recoup the lender’s losses.
Tax lien or tax deed auctions occur when homeowners fail to pay their property taxes. The government seizes the property and sells it to recover unpaid taxes.

In either case, properties are typically sold as-is, meaning buyers assume all the risks associated with the home’s condition. Unlike traditional home purchases, auction properties may not allow buyers to conduct a thorough inspection beforehand. Therefore, due diligence is crucial before making a bid.

According to RealtyTrac, 43% of buyers who purchase homes at auction are first-time buyers, showing that auctions are for more than seasoned investors. However, due to the fast-paced nature of auctions, preparation is critical, especially when securing financing.

Step 2: Arrange for Auction-Specific Financing

Contrary to popular belief, you don’t need all the cash upfront to purchase a home at auction—but you do need to know what your financing options are, and you’ll need to secure them before the auction.

Here are the most common ways to finance a house bought at auction:

Hard Money Loans

Hard money loans are one of the most popular financing options for auction properties. These loans are typically provided by private lenders and secured by the property. They are known for having a fast approval process, making them a good fit for auction buyers who need to close quickly.

Hard money loans, however, come with some caveats:

They often have higher interest rates, usually ranging from 8-15%, and
The loan term is typically short, ranging from 6 to 24 months, because these are temporary solutions until the buyer can secure more traditional financing.

Hard money lenders focus less on your credit score and more on the value of the property and the potential for resale or rental income. According to CoreLogic, hard money loans accounted for 7% of all investment property transactions in 2022, a number that’s expected to grow as investors seek faster financing options.

Auction-Specific Mortgages

Some lenders offer mortgage products specifically for auction properties. These can include traditional mortgage lenders or specialized auction finance companies. Auction mortgages are typically pre-approved loans that buyers can use to secure a property at auction.

To obtain this type of financing, you will need to:

Get pre-approval from the lender before the auction based on the amount you expect to bid,
Provide a deposit (typically 5-10% of the purchase price) immediately after the auction if you win the bid, and
Work with the lender to close the sale within the required time frame, usually 30-45 days.

Because auction properties often require repairs, many lenders will approve auction mortgages contingent upon renovation plans. In some cases, these loans are structured similarly to renovation loans like FHA 203(k) or Fannie Mae’s HomeStyle loans, which roll the cost of repairs into the mortgage.

Personal or Home Equity Loans

If you already own a home with significant equity, you can tap into that equity to purchase an auction property. Home equity loans or home equity lines of credit (HELOC) allow you to borrow against the value of your existing home, giving you the funds to buy a new property.

While these loans are a more affordable option (with interest rates around 5-6% as of 2023, according to Bankrate), they come with risks. You’re putting your current home on the line to finance a new purchase, so this is only a viable option if you’re confident in your ability to manage both properties.

Another alternative is a personal loan, which usually comes with higher interest rates and shorter loan terms, making it less attractive for most buyers unless the loan amount is relatively small.

Step 3: Prepare for Auction Day

Once you’ve arranged for financing, it’s time to prepare for the auction. Here are the key steps you’ll need to take before the how to buy a house at auction without cash

Do Your Homework

Auction properties are sold “as-is,” so gathering as much information as possible is essential before bidding. This can include:

Researching the property’s condition: Some auction properties allow for limited inspections. If not, drive by the home, look at public records, and review comparable sales in the area.
Understanding the legal standing: Verify no unresolved liens or legal disputes on the property. Most auctions will provide a property report or title search, but it’s up to the buyer to conduct their due diligence.
Setting your maximum bid: Establish a firm bidding limit based on your financing options and budget. It’s easy to get caught up in the excitement of bidding, so stick to your financial plan.

Bring the Required Deposit

Most auctions require buyers to bring a deposit on auction day, often 5-10% of the final bid amount. This can usually be paid with a cashier’s check or certified funds. If you win the auction, this deposit will be applied toward the purchase price, and you’ll have a set period to finalize the financing and complete the sale.

Be Ready to Close Quickly

One of the main advantages of auction properties is the speed at which the sale closes. In most cases, you’ll need to complete the transaction within 30-45 days. Securing your financing will make this process smoother, ensuring you don’t miss out on the property or face penalties for delayed closing.

Step 4: Secure Traditional Financing After the Auction

If you used a short-term loan, such as a hard money loan, to finance the auction purchase, you’ll need to secure more permanent financing once the deal closes. This is called “refinancing out” of your initial loan. Traditional mortgages, such as conventional, FHA, or VA, can then be used to pay off the higher-interest loan, reducing your monthly payments and extending the loan term to more manageable levels.

Conclusion

Buying a house at auction without cash may seem daunting, but it’s entirely possible with the proper planning and financing. Whether you opt for a hard money loan, an auction-specific mortgage, or use your existing home equity, understanding your financing options and preparing ahead are crucial steps to success.

From the beginning of our story, David ultimately secured his dream investment property by combining a hard money loan with careful research and a solid financial strategy. The key to his success—and yours—lies in preparation. By following these steps and securing the right financing, you, too, can take advantage of the opportunities that buying a house at auction can offer.