For real estate investors, there are particular pros and cons of buying a rental property at auction. Even though auctions can present new ways to acquire investment properties and plausibly improve your hopes of locating a magnificent bargain, buying at auction can also be far riskier than securing properties in other ways.
Having a limited period of time and information on the properties for auction, the chances of making a very expensive mistake are high. There are countless means to mitigate that risk, but anyway, you should learn as much as you can regarding residential property auctions before aiming whether procuring your next investment property via this route is right for you.
There is multiple reasons why a residential property may end up in an auction. For example, when 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 an alternate situation, 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 enter an acceptable arrangement with them, the property 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. At times, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even approve you to explore the property yourself. It is not uncommon for the original 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 quite a while, it may more or less 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 have a dialog with the neighbors, real estate agents, and search local records for evidence, which may help you. Excluding 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 need to learn before aiming to get a property in this manner. Oftentimes, 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. Several auctions are held in person, while others may be conducted online.
Anyhow, once the bidding begins you’ll need to know how real estate auctions usually work. As a rule, the lender is not required to accept your offer even if you are the highest bidder. Generally speaking, the starting price is the amount owed to the bank or lender; in other auctions, the starting price may be lessened to increase the auction’s chances of success. The auctioneer may also lay a hidden reserve price on the property, which designates 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: time and time again, you have to bring cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. Though various auctions do allow for financed purchases, at the very least you will still be required to be prequalified before you can bid. There are also auction fees that must be paid off.
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, even though the requirement for immediate payment. Therefore, procuring an investment property at auction is primarily something only those who can allow paying cash can operate to do.
If you have the confidence and an aptitude for risk-taking, buying investment properties at auction can be a compelling habit to grow your portfolio of rental properties, and maybe even encounter an awesome deal along the way. But there is a lot to understand before you decide to buy at auction, making it imperative to have industry authorities that you can count on to help you figure out whether buying at an auction is the best choice for you.
At Real Property Management Southeast Idaho, we can assist property investors who are thinking about buying their next rental home at auction. We have the capability and services that you can adopt to make the best advantageous pick for your investing style and goals. For more information, contact us online or call us at 208-522-2400.
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