How to Buy a House at an Auction Without Having Cash

How foreclosure auctions are different

A foreclosure auction gives a homebuyer the chance to save money. Lenders who foreclose on homes and then sell them at auction may be willing to let go of the home for significantly less than the market value. The amount a buyer can save varies depending on the supply of foreclosures; when there aren’t many foreclosures, the discounts available at foreclosure sales aren’t as steep as they might be at another time.

Distressed sales, which include properties in foreclosure and short sales, accounted for only 2% of total sales in April 2024, reports the National Association of Realtors® (NAR). “The foreclosure market is almost dried up,” says John Durham, a top agent in McDonough, Georgia, with 23 years of experience, including many purchases at auctions.

When housing prices are especially strong, homeowners typically have lots of equity in their homes. And then if they start having trouble making mortgage payments, they are much more likely to sell those homes via the traditional route than to let the home be foreclosed on.

Having said that, foreclosures still happen all the time, and the auctions — traditionally held live and in person on the local courthouse steps on the first Tuesday of every month — also continue. And many homebuyers are interested in auctions and the opportunity to snag a deal.

The catch home shoppers need to keep in mind? “Very few, if any,” have the necessary cash, Durham says.

While state laws vary somewhat, as a general rule, there is no way out of the requirement to pay for an auction purchase in cash.

That doesn’t mean you need to bring a suitcase full of Benjamin Franklins to the courthouse steps. Cashier’s checks are the normal way to settle up after an auction. And you won’t always need to have even that on the day of the auction.

You may be able to put down a deposit of 10% or so of the purchase price and then have a few days or even a few weeks to produce the balance.

However, you will normally have to prequalify before being allowed to bid at an auction. You’ll need to show that you have access to the necessary funds — and you’ll present a credit card. This credit card serves a purpose similar to a deposit of earnest money on a conventional purchase. “If you win the bid and don’t buy the house, they’ll hit you for a couple of grand,” Durham says.

With these caveats in mind, here are ways to finance a cash purchase at auction.

1. Get a hard money loan

Hard money lenders are financial institutions that lend money to people with less than stellar credit or complicated finances in order to buy assets such as real estate. Hard money lenders will extend a loan secured by real estate and just like a normal mortgage,  if the borrower doesn’t pay it back, the lender can seize the asset.

Hard money lenders aren’t as concerned about things like credit scores as other lenders because they charge significantly higher interest rates over a shorter period to help offset the increased risk of the loan.

These lenders do look carefully at the asset — in this case, the house — securing the loan. The lender will consider the market value and condition of the house to make sure they feel it is valuable enough to secure the loan (i.e. they think they’ll still be able to make a profit if you default).

A hard money loan will often work for homebuyers at auction because hard money lenders are often willing to move fast. A hard money lender can often provide you with funds to complete a purchase in days instead of weeks or months.

There are downsides to hard money loans, however. For one, they usually have significantly higher interest rates than conventional mortgages. A hard money loan is likely to charge 10% to 15% interest.

Also, these loans are for much shorter terms. Typical hard money loans are only between 6 and 12 months. After that time, the lender will expect you to pay off the entire balance. For these reasons, homebuyers who buy with hard money loans generally refinance their purchases with conventional mortgages within a few months.

To get a hard money loan, research local lenders to find one that understands your local market. You can do this by talking to knowledgeable real estate agents or attorneys.

Next, you’ll have to provide the lender with details about the home that will secure the loan. This means researching the home before the auction and providing the lender with information on its market value, any information you can get on its state of repair, current occupancy, and other details.

You’ll also have to make a down payment, typically 25% or so. And you have to show you have the cash on hand to make the payments for the life of the loan. You may also need to explain what will happen when the loan’s term is up, whether you’ll refinance the home or sell it.

Once you satisfy the hard money lender’s requirements, you can obtain the cashier’s check you will need to settle the bill after the auction.

2. Use peer-to-peer lending

Online peer to peer (P2P) lending platforms connect borrowers with individuals who may loan money. The interest rates, down payment, security, and information requirements may be similar to hard money lenders. However, they can vary widely according to the individual lender or group of lenders.

One difference with hard money lenders is that P2P lenders are unlikely to be able to finance the purchase of a very expensive home. Prominent P2P platform Lending Club, for example, has an upper limit of $50,000 for a loan to purchase a home.

However, P2P lenders can produce money fast — in the case of Lending Club, in as little as 48 hours.

3. Use your home’s equity

If you already own a home, you may be able to use your home’s equity to secure a home equity loan or line of credit. Then you can use the proceeds of the home equity loan to pay for your foreclosure house won at auction.

Home equity loans can provide much more cash than P2P loans and also offer more attractive interest rates than hard money lenders. Bank of America, for instance, offers a home equity loan with an initial starting rate of 7.49%, rising to 9.9% after six months.

Home equity loans can also be held for much longer terms than hard money loans, so you won’t have to refinance quickly.

The big risk with a home equity loan, however, is that your current home is providing the security for the loan. If you don’t make the required payments on the home equity loan, your own residence could wind up in foreclosure.

4. Get a personal loan

A personal loan is one that you get on the basis of your credit history, credit score, and ability to repay loans. You can get personal loans from many sources, including online lenders, credit unions, and banks.

Credit unions often have attractive terms but may require you to pay a nominal membership fee, live in a certain region, or belong to a certain group (such as a member of the armed services) in order to borrow.

Credit union personal loans have longer terms than hard money loans, typically three to five years. The rates are similar, from 8.99% to 18%. However, you may have trouble borrowing enough with a personal loan to pay for your entire auction purchase, as the limits typically top off at $50,000.

On the plus side, you can get funds from a personal loan quickly. And you generally won’t need to put up any collateral for security.

5. Get a fast mortgage

In very rare cases, you may be able to fund a foreclosure purchase with a conventional mortgage. It will depend on finding a lender who can move much faster than the typical 30 days or so it takes to fund a conventional mortgage or buying a foreclosed home from a bank that gives you weeks instead of days to come up with the cash — or both.

The risk with this approach is that if there are delays in closing and funding the loan, you may have to come up with all the cash on short notice, perhaps by using a more expensive or riskier approach. It requires confidence in your lender to commit to buying a home at auction with funds from a conventional mortgage.

6. Finance with the seller

Because the seller of a home put up for auction is usually a lender, it would make sense that the lender would finance the purchase.

However, lenders very rarely finance the purchase of homes sold at auction. In a pinch, if your other options for coming up with the cash run into problems, it may be worthwhile asking for a loan from the lender that is selling the house. This isn’t likely to be a good main strategy, though.

7. Buy through an auction site

Courthouse steps aren’t the only place foreclosed homes are auctioned to the highest bidder. Online auctions at sites such as Auction.com also offer opportunities to bid on foreclosed homes.

The process is different when bidding at an online auction. But one major difference is that you don’t have to produce the cash if you win the bid.

“If you bid on a property and win, you have time to get your finances in order,” Durham says. Similar to a conventional purchase, you could have several weeks to arrange financing. “If you win the bid, it’s kind of like a normal closing,” he says.

More foreclosure cautions

Paying with cash is far from the only difference between buying conventionally and buying at auction.

For instance, you may be the highest bidder and still not win the house if the amount you bid doesn’t meet the minimum prices set by the seller. Also, in many jurisdictions, the owner of a foreclosed home can regain title to it even after it’s been sold at auction if they are able to make up their missed payments.

Time is an essential ingredient for successful auction buying — time spent arranging to have the necessary cash, time spent studying the process of auctions, time spent studying local values, and time spent identifying suitable deals. And, as of 2024, time may best be spent waiting for the foreclosure market to get better, with more plentiful foreclosed homes, fewer competing buyers, better rates, and better prices.

“The big investment companies we call hedge funds are paying retail, or very close to it, on some of these houses,” Durham says. “So it’s very hard to compete with them.”

Learning about buying at auctions with or without cash also takes energy and careful study. And it requires expert advice, which can be hard to come by.

“I’d never send somebody to the courthouse steps with a Realtor who has not bought at the courthouse steps before,” Durham says, “and there are very few who have.”

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