For real estate investors, there are numerous pros and cons to buying a rental property at auction. Although auctions can present new ways to acquire investment properties and potentially enhance your possibility of discovering an awesome deal, buying at auction can also be far riskier than buying properties in other ways.
With little time and details towards the properties for sale, the chances of making a very expensive mistake are high. There are several approaches to mitigate that risk, but still, you should recognize as much as you can around residential property auctions before resolving whether securing your next investment property in this approach is wise for you.
There are countless elements of 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 other instances, the homeowner loses the house due to the nonpayment of the mortgage loan or owners association assessments.
When a homeowner defaults on his or her mortgage and the lender is unable to arrive at an acceptable arrangement with them, the property comes to a halt and is 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. Occasionally, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even grant you the opportunity to look around the property yourself. It is very regular 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 some time, it may also appear to have been vandalized or had squatters living in it. Without a course to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can converse with neighbors, real estate agents, and search local records for information, which may guide your final decision. In addition to 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 equipped 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 something that you must understand before making a risk to procure a property this way. In several instances, 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. A handful of auctions are held in person, while others may be conducted online.
As soon as the bidding gets underway, you’ll need to comprehend how real estate auctions work. In some settings, the lender is not required to accept your offer even if you are the highest bidder. Most of the time, the starting price is the amount owed to the bank or lender; in other situations, the starting price may be much less 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: you must have cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. Even though some auctions do allow financed purchases, at the least you will be required to be prequalified before you can bid. There are also usually auction fees that must be paid for.
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 should also go through escrow and closing before you can take possession of the property, regardless of the requirement for immediate payment. Because of this, securing an investment property at auction is oftentimes something only those who can afford to pay cash are able to do.
If you have the assets and affection for risk-taking, buying investment properties at auction can be a persuasive approach to grow your portfolio of rental properties, and maybe even identify a perfect deal in the long run. But there is a whole heap to recognize before you can decide to buy at auction, making it paramount to have business experts that you can trust to help you select whether buying at an auction is the best decision for you.
At Real Property Management Avitus, we can assist property investors who are considering buying their next rental home at auction. We have the information and assets that you can use to make the perfect choice for your investing style and goals. For more information, contact us online or call us at 281-570-6357.
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