For real estate investors, there are both pros and cons to buying a rental property at auction. Even though auctions can present new ways to acquire investment properties and quite possibly maximize your odds of scoring a great bargain, buying at auction can also be far riskier than purchasing properties in other ways.
With not enough time and information regarding the properties that are being sold, the chances of making a very expensive mistake are high. There are several ways to mitigate that risk. Still, you ought to learn as much as you can about residential property auctions before deciding on whether buying your next investment property this way is suitable for you.
There are several reasons why a residential property may end up in an auction. For example, 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 another common scenario, the homeowner loses the house due to nonpayment of the mortgage loan or owners association assessments.
Whenever a homeowner default on his or her mortgage and the lender is not able to reach an acceptable arrangement with them, the property 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 cases, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even let you look around the property yourself. It isn’t unusual 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.
In the event that the property has been vacant for quite a period of time, it could 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 make small talks to neighbors, real estate agents, and search local records for information, which could help. Past 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 ready 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 have to recognize 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. Some auctions are held in person, while others may be conducted online.
Regardless, as soon as the bidding starts, you’ll have to understand how real estate auctions usually work. In some cases, the lender is not required to accept your offer despite the fact that you are the highest bidder. Most of the time, the starting price is the amount owed to the bank or lender; in other cases, 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 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. Though some auctions do allow financed purchases, at the very least, you will still need to be prequalified before you can bid. There are also typically 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 must also go through escrow and closing before you can take possession of the property, in spite of the requirement for immediate payment. Therefore, buying an investment property at auction is usually something only those who have enough money to pay cash can manage to do.
If you have the resources and an affinity for risk-taking, buying investment properties at auction can be an effective way to grow your portfolio of rental properties, and possibly even spot a great deal in the process. However, there is a lot to know before you decide to buy at auction, making it crucial to have industry professionals that you can rely on to help you choose whether buying at an auction is the right option for you.
At Real Property Management Dominion, we can assist property investors in thinking about buying their next rental home at auction. We have the tools and resources that you can use to make the best possible choice for your investing style and goals. For more information, contact us online or call us at 757-395-4274.
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