For real estate investors, there exist both pros and cons to buying rental property at auction. Although auctions can give whole new ways to acquire investment properties and could even greatly increase your odds of scoring a great deal, buying at auction can likewise be far riskier as compared to buying properties in other ways.
With not enough time and limited information concerning the properties that are available for sale, the chances of making a very expensive mistake are high. There are many ways to mitigate that risk, but even so, you ought to learn as much as you can about residential property auctions prior to deciding whether or not you should buy your next investment property this way.
There are plenty of reasons why a residential property may end up in an auction. For instance, if the homeowner fails to pay their property taxes, the tax authority may seize the property and conduct a tax lien auction to recover the taxes owed to them. In a widespread scenario, the homeowner loses the house due to the nonpayment of the mortgage loan or owners association assessments.
Whenever a homeowner defaults on his or her mortgage and the lender is not able to come up with an acceptable arrangement with them, the property then usually ends up subject to the foreclosure process. Possession of the property is reclaimed by the lender, and the property is often sold off at auction. These foreclosure auctions are usually overseen by trustees that work for the bank or lender who holds the mortgage loan.
What makes buying these types of properties so risky is that the full details of their condition are often unknown. In some situations, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even permit you to look around the property yourself. It is not uncommon for the previous owner to have neglected to perform routine maintenance and even significant repairs on the property, often due to a lack of funds. The former owner may even have intentionally damaged the property out of spite, sometimes stripping the house of any element that might have the slightest value – appliances, lightbulbs, doorknobs, even cabinets, and fixtures.
If the property has been vacant for a while, it may also have been vandalized or had squatters living in it. Without a way to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can speak to neighbors, real estate agents, and search local records for information, which may help. Beyond the physical condition of the house, when dealing with foreclosures, there is a high chance that the property has liens against it or other encumbrances that would need to be paid off before you could purchase it. If you are not prepared to pay these costs and make significant repairs to the property, buying at auction may not be your best option.
The process of bidding in an auction is also one thing that you need to be able to learn before making an effort to buy a property this way. In many cases, to bid in an auction, you will need to register for it in advance and submit a refundable deposit of between 5% and 10% of the property’s expected selling price to the bank or lender. Few auctions are held in person, while others may be conducted online.
Nevertheless, as soon as the bidding starts, you’ll need to recognize how real estate auctions typically work. In some situations, the lender is not required to accept your offer even if you are the highest bidder. Often, the starting price is the amount owed to the bank or lender; in other cases, the starting price may be a bit 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 different from other situations in one significant way: most of the time, you must carry cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. While some auctions do allow financed purchases, at a minimum, you will still need to be prequalified before you can bid. There are also the usual auction fees that must be paid.
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 have to also go through escrow and closing before you can take possession of the property, despite the requirement for immediate payment. That’s why buying an investment property at auction is usually something only those who can afford to pay cash can manage to do.
If in case you have the means and an affinity for risk-taking, buying investment properties at auction can be a good way to grow your portfolio of rental properties, and possibly even find a great deal in the process. However, the truth remains that there is a lot to know before you should want to buy at auction, making it vital to have industry professionals that you can rely on to assist you in determining whether or not buying at an auction is the suitable choice for you.
At Real Property Management Hometown, we can assist property investors who are thinking of buying their next rental home at auction. We have the tools and resources that you can utilize to make the optimum choice for your investing style and goals. For more information, contact us online or call us at 501-701-4702 or 501-239-5811.
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