For real estate investors, there are specific pros and cons of buying rental property at auction. While auctions can devote new ways to acquire investment properties and feasibly create an opportunity of spotting a fantastic deal, buying at auction can also be far riskier than picking up properties in other traditional means.
By having deficient time and knowledge about the properties for auction, the chances of making a very expensive mistake are high. There are a handful of processes to mitigate that risk, however, you should grasp as much as you can regarding residential property auctions before deciding whether purchasing your next investment property this way is a suitable choice for you.
There are countless 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 case, 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 did not reach an acceptable arrangement with them, the property naturally 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. From time to time, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even let you investigate around the property yourself. It is very standard for the former 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 have been vandalized or had squatters living in it. Without a means to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can inquire with the neighbors, real estate agents, and search local records for facts, which may help. Other than 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 willing 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 comprehend before attempting to buy a property this way. Also, 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.
All the same, as soon as the bidding begins you’ll need to know how real estate auctions really work. In some situations, the lender is not required to accept your offer even if you are the highest bidder. For the most part, 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 lay a hidden reserve price on the property, which implies 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 certain auctions do allow financed purchases, you will still be obliged to be prequalified before you can bid. There are normally auction fees that must be paid also.
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. For this cause, obtaining an investment property at auction is typically something only those who can provide to pay cash can accomplish to do.
If you have the funds and a penchant for risk-taking, buying investment properties at auction can be an operative tactic to grow your portfolio of rental properties, and maybe even notice a wonderful deal in the process. But there is a lot to understand before you decide to buy at auction, making it necessary to have trade experts that you can rely upon help you confirm whether buying at an auction is the true answer for you.
At Real Property Management Legend, we can assist property investors who are considering to buy their next rental home at auction. We have the competence and assistance that you can avail of to make the best decision for your investing style and goals. For more information, contact us online or call us at 214-227-2404.
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