For real estate investors, there are both pros and cons to buying a rental property at auction. While auctions can offer new opportunities to acquire investment properties and enhance your chances of finding a great bargain, buying at auction can be substantially riskier than obtaining properties through other methods.
With limited time and information about the properties for sale, the likelihood of making a costly error is high. There are several ways to mitigate that risk, but you should gather as much knowledge as possible about residential property auctions before deciding whether buying your next investment property this way is suitable for you.
Why might a residential property end up in an auction?
Residential properties may be auctioned for various reasons, such as unpaid property taxes leading to tax lien auctions or homeowners losing their homes due to mortgage or association fee defaults.
When a homeowner defaults on their mortgage and the lender cannot reach a satisfactory arrangement with them, the property typically ends up subject to foreclosure. The lender reclaims possession of the property, and the property is often sold off at auction. These foreclosure auctions are usually managed by trustees who work for the bank or lender that holds the mortgage loan.
Why is buying real estate at auction risky?
Purchasing these types of properties is risky because the full details of their condition are often unknown. Occasionally, the bank or lender may not even allow you to conduct a professional inspection on the property before bidding or even to look around the property yourself. Previous owners often neglect routine maintenance and significant repairs due to financial issues. In some cases, they may intentionally damage the property, removing items of value like appliances, light fixtures, and fittings. If the property has been vacant for some time, it may also have been vandalized or had squatters residing in it. Without a way to legally get inside the property to assess its condition, buying a property at auction will always be a risk. You can talk to neighbors and real estate agents and search local records for information, which may assist. Beyond the house’s physical state, when dealing with foreclosures, there is a high likelihood that the property has liens against it or other encumbrances that would need to be resolved before you could acquire it. If you are not ready to pay these costs and perform significant repairs to the property, buying at auction may not be your best option.
What is the process of bidding on real estate?
The process of bidding in an auction is also something that you need to understand before attempting to buy a property this way. To bid in an auction, you typically must register in advance and pay a refundable deposit of 5% to 10% of the property’s expected selling price. Auctions can be conducted in person or online.
Either way, once the bidding starts, you’ll need to understand how real estate auctions typically work. Sometimes, the lender is not required to accept your offer, even if you are the highest bidder. The starting price is often the amount owed to the bank or lender; in other instances, the starting price may be considerably lower to increase the auction’s chances of success. The auctioneer may also set a hidden reserve price on the property, which means that if the bidding does not meet or exceed that amount, the property will not be sold, regardless of who wins.
Financing a property at auction is unique because you usually need to pay in full immediately after winning, using cash, a money order, or a cashier’s check. Although some auctions may permit financed purchases, prequalification is typically required before bidding. Auction fees are also generally applicable.
How are real estate auctions finalized?
Auctioneers, banks, attorneys, and other entities who have incurred debt during or after the foreclosure and auction process may often require payment in full before you can finalize the sale of your property. You must also go through escrow and closing before taking possession of the property, despite the requirement for immediate payment. For this reason, buying an investment property at auction is usually something only those who can afford to pay cash can manage to do. If you have the means and an affinity for risk-taking, buying investment properties at auction can be an effective way to grow your portfolio of rental properties and find a great deal in the process. But there is much to learn before you decide to buy at an auction, making it essential to have industry professionals you can trust to help you decide whether buying at an auction is the right option.
At Real Property Management Allies, we can assist property investors who are considering buying their next rental home at auction. We have the tools and resources to help you make the best possible choice for your investing style and objectives in Hiram and nearby. For more information, contact us online or at 678-680-5065.
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