For rental property investors, buying real estate at an auction presents a great opportunity to secure a property below market value. However, there are several aspects you need to know before your first auction. Buying income properties at auction is far riskier than buying them in other ways. Although having good information and a strategy can help reduce some of that risk, real estate auctions will never be suitable for the faint-hearted – or risk-averse – investor. Those comfortable with some risk keep reading to learn the basics of successfully buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
The initial thing to learn before buying an income property at auction is that the procedure includes risks and benefits. While houses sold at auction are offered below market value, most are in poor condition or have significant defects requiring extensive repairs. You may only be able to inspect the property after you buy, so this is one risk that may be difficult to mitigate.
Other risks of buying at auction involve the risk of overbidding in the heat of the moment and face potential delays after purchase as the property works its way through multiple agencies, state or country redemption periods, and so on.
On the other side, auctions are a particular place to find real bargains on rental real estate. When you buy a home at a considerable discount, you can increase your cash flows and general return on investment. A further benefit is that you can take ownership of the property quickly. In several circumstances, auctions can transfer title to a home within 30 days, letting you start planning for your first renter as soon as possible. This suggests that your property might begin generating rental income considerably sooner than a standard sale.
How Real Estate Auctions Work
The first step of buying a property at an auction begins by finding real estate auctions. This can be achieved via searching online auction websites or databases or working with a real estate agent specializing in auctions. Once you’ve discovered a potential property, your next move is to learn as much as you can about it. Don’t forget to perform a thorough comparative market analysis and appraise the property’s potential as a rental home. If achievable, conduct a tour or arrange an inspection of the property. If that is not possible (which is generally the case), you could drive past and look through the windows. It would be ideal if you conducted your own study. Search for any occupants, liens, or other potential complications that may create roadblocks to ownership.
To bid competitively at an auction, having plenty of cash on hand and financing lined up before you begin to bid is important. In most circumstances, to buy a property at auction, you will need a minimum of 10% of the selling price for a deposit, the ability to pay the full balance instantly (or within a matter of days, in some scenarios), and cash for administrative fees, survey costs, and insurance. Additionally, there are different types of auctions, so be sure to meticulously review all the auction rules and ensure that you obey them.
What to Expect at an Auction
Before bidding in a real estate auction, you must register and pay a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, expect to arrive around an hour before the auction starts to check in and receive your official bidding card, which you will use when you bid. You’ll log in to the auction website to bid if the auction is online. Once the bidding kicks off, you need to understand exactly how much you can offer before the property is no longer a bargain. If you can avoid a bidding war, your risk of paying too much will be greatly minimized.
Within minutes, you will know whether you’ve won your auction or not. If you don’t win, you will get a deposit refund. However, if you win, you may need to pay for the property in full immediately after the sale. Some auctions ask you to bring cash or money order to complete your transaction right away. Others will give you till tomorrow or a few days to submit the necessary payments. Failure to do so will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so completing payment as requested is critical. Then, even if you won the property at auction, you will still have to go through escrow and closing, just as you would when buying any other property.
Building your investment portfolio – through auctions or any other method – can be a difficult but rewarding endeavor. Real Property Management Results provides market evaluations and advice on potential real estate purchases in Newburgh and neighboring areas. Contact us online or call at 812-461-1676.
Originally Published on Apr 2, 2021
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