Anyone who's seen an episode of HGTV's Flip Or Flop has vicariously witnessed a real estate auction. The husband and wife team find out about an auction minutes before it takes place, frantically drive by the property, make a decision whether or not to buy the home (they always do, spoiler alert), then rush to the auction site with cashier's check in-hand, then join very serious looking people who also want to buy the home. After the auctioneer rattles along incomprehensibly for about two minutes, the couple has their home.

Is there any truth to this? Kind of. And just what is a real estate auction?

Let's start with why a home would be put up for an auction in the first place. The most frequent reason is that the house went into foreclosure and the bank is trying to recoup its losses from the mortgage it gave the owner. Put it up for auction, get it off the books, and problem solved.

Another common reason is that the home has a lien placed on it. A lien is essentially a notice to the public that the property belongs to a specific creditor. Don't have the money to pay them back? The creditor can claim a portion of the home's sale revenue to get the money owed by the owner. In very few cases can the creditor force a home sale, except with one very notable and obvious exception: the government.

Photo by Neighborhoods.com

If you owe outstanding county or city taxes - in some incredible situations, by just a few hundred dollars - the unpaid government authority can place a lien and force the sale of your home to recoup their money (unsurprisingly, this is done most often during times of budget shortfalls). In some extreme circumstances, there's a second lien on the home. A second lien is an additional debt claimed by a creditor. If you buy a second position lien, it's subordinate to the first lien, which could cause foreclosure, wiping out all the money you spent. Before purchasing a home via auction, check with the local governmental authority to ensure there is not a second lien on the home.

So essentially an auction takes place because the owner of the property cannot afford to pay their mortgage to the bank or taxes to the local government, thus forcing the sale of the home so the creditor can get their money back.

The home is then placed on a local database, allowing the public to know that the home is officially up for auction. In some states the notice is very short - like a couple hours short - while in others you could know days or weeks in advance.

Although a handful of homes put on an open house before an auction, most of them are blind buys. You can't inspect the home or walk through it. Your knowledge on the asset that you're about to drop tens or hundreds of thousands of dollars on is relegated to the Multiple Listing Service or, if you have time, a quick drive by. Those new to the foreclosure market should steer clear of auctions. Even veterans don't really know what they're getting into.

What draws people to auctions is the same reason people are drawn to any investment. If it seems promising, they don't want to miss out on big windfall, but it comes with a steep risk. Sans inspections, walk-throughs, and time for contemplation, bidders don't have a deep knowledge of what exactly they're buying.

Photo by Neighborhoods.com

Real estate auctions differ state to state, but most of them will require a cashier's check for an amount determined by the auction holder. What ensues is sitting in a conference room or standing in a parking lot with an auctioneer and other bidders. You might notice that the other bidders have their hands in their pockets and wearing sunglasses to not show emotion, a crowd more appropriate for the World Series Poker rather than real estate investing. Someone gets the house or, if there are no takers, the home goes back to the holder of the home.

Even if you win the auction, there's a chance that the bank won't approve of the final bid. This is called a reserve auction, where the bank can approve or reject the winning bid. Sometimes the bank will hold an auction where the highest bidder gets the home no matter what (absolute auction) and others where the bidding starts with the lowest acceptable amount (minimum bid).

Auctions sometimes work out very well for those who know what they're doing. It can be a great way to find a hidden gem that can be renovated for a high profit and, in nearly all cases, you can acquire a home for half of it's previous sold price.

Of course this isn't always the case. Unseen issues can turn what appears to be a great investment into a money pit that will never return the money put down for it. Tenants could still be on a lease, meaning that you'll have to go through the long and expensive eviction process. Maintenance issues are common (remember that the previous owner was having financial difficulty which is why it went to auction in the first place). What looks like a hidden gem could turn into a hidden nightmare if you don't know what you're not careful.