With minimal time and knowledge about the properties available for a bargain, the chances of making a very expensive mistake are high. There are lots of methods to mitigate that risk, but nonetheless, you should master as much as you can regarding residential property auctions before deciding whether obtaining your next investment property via this path is practical for you.
There are lots of components of why a residential property may end up in an auction. Such as, 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 situation, the homeowner loses the house due to the nonpayment of the mortgage loan or owners association assessments.
When the homeowner defaults on his or her mortgage and the lender fails to strike an acceptable arrangement with them, the property essentially ends up in 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. Sometimes, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even enable you to look around the property yourself. It is very easy for the former possessor 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 appeared to be vacant for some time, it could also have been vandalized or had squatters living in it. Lacking a way to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can chat with neighbors, real estate agents, and search local records for information which may aid you in making a decision. Regarding 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 ready 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 ought to be aware of before obtaining a property like this. In numerous cases, 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. Various auctions are held in person, while others may be conducted online.
Nonetheless, when the bidding commences you’ll need to know how real estate auctions normally go. In various circumstances, the lender is not required to accept your offer even if you are the highest bidder. Constantly, the starting price is the amount owed to the bank or lender; in other things, the starting price may be considerably reduced to increase the auction’s chances of success. The auctioneer may also lay 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: typically, you should always carry cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. Though certain auctions do allow financed purchases, at the least, you will still need to be prequalified before you can bid. There are also auction fees that must be paid.
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, aside from the requirement for immediate payment. As a consequence, obtaining an investment property at auction is normally something only those who can afford to pay cash can be able to undertake.
If you have the finances and tendency for risk-taking, buying investment properties at auction can be a beneficial means to grow your portfolio of rental properties, and maybe even locate a good deal in the process. But there are many things to understand before you can buy at auction, making it pivotal to have business pros that you can believe in to help you conclude if buying at an auction is the best decision for you.
In Real Property Management One Source, we can assist property investors who are considering buying their next rental home at auction. We have the equipment and funds that you can harness to make the most important decision for your investing style and goals. For more details, contact us online or call us at 214-960-1612.