For real estate investors, there are a few pros and cons to buying a rental property at auction. While auctions can give new ways to acquire investment properties and arguably increase your chances of uncovering a tremendous deal, buying at auction can also be far riskier than investing in properties via other options.
With little time and consultation about the properties for sale, the chances of making a very expensive mistake are high. There are innumerable procedures to mitigate that risk, but despite that, you should comprehend as much as you can about residential property auctions before confirming whether investing in your next investment property is indeed the best option for you.
There are innumerable 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 another typical condition, 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 unsuccessful to arrive at an acceptable arrangement with them, the property often becomes 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 circumstances, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even qualify you to explore around the property yourself. It is very popular for the foregoing homeowner 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 have been vandalized or had squatters living in it. Without a method to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can have a dialogue with neighbors, real estate agents, and search local records for enlightenment, which may help. Outside 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 disposed 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 need to assume before trying to obtain a property in this manner. In certain conditions, 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.
In any case, as soon as the bidding begins you’ll need to learn how real estate auctions function. In some settings, the lender is not required to accept your offer even if you are the highest bidder. To a degree, the starting price is the amount owed to the bank or lender; in other situations, the starting price may be substantially lower to increase the auction’s chances of success. The auctioneer may also set a hidden reserve price on the property, which indicates 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: oftentimes, you must generate 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 the very least, you will need to be prequalified before you can bid. There are also required auction fees that must be reimbursed.
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, in spite of the requirement for immediate payment. For this scenario, spending on an investment property at auction is normally something only those who can bear to pay cash can afford to do.
If you have the pluck and partiality for risk-taking, buying investment properties at auction can be a powerful strategy to grow your portfolio of rental properties, and perhaps even find a tremendous deal along the way. But there is quite a lot to learn before you can buy at auction, making it significant to have industry professionals that you can rely on to help you select whether buying at an auction is the best option for you.
At Real Property Management Insight, we can assist property investors in deciding about buying their next rental home at auction. We have the capability and materials that you can utilize to make the best possible choice for your investing style and goals. For more information, contact us online or call us at 540-998-6917.
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