For real estate investors, there are certain pros and cons to buying rental properties at auction. Even though auctions can offer new ways to acquire investment properties and perhaps raise your odds of locating a striking deal, buying at auction can also be far riskier than getting properties through different approaches.
Having insufficient time and details as regards to the properties for auction, the chances of making a very expensive mistake are high. There are a lot of techniques to mitigate that risk, but nevertheless, you should learn everything you can regarding residential property auctions before choosing whether getting your next investment property via this method is perfect for you.
There are a lot of determinants why a residential property may end up in an auction. Say 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 standard development, 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 not able to reach an acceptable arrangement with them, the property commonly finds itself 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. Occasionally, 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 the property yourself. It is very common for the previous holder 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.
In case the property has been vacant for some time, it may also have been vandalized or had squatters living in it. Without a measure to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can talk to neighbors, real estate agents, and search local records for details, which may come in handy. Besides 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 have to consider before trying to acquire a property this way. In many situations, 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. Certain auctions are held in person, while others may be conducted online.
Regardless, as soon as the bidding begins you’ll need to fathom how real estate auctions operate. In some instances, the lender is not required to accept your offer even if you are the highest bidder. Frequently, the starting price is the amount owed to the bank or lender; in other concerns, the starting price may be notably lesser to increase the auction’s chances of success. The auctioneer may also place a hidden reserve price on the property, which denotes 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: often, 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. Although a few auctions do allow financed purchases, at the very least you will be mandated to be prequalified before you can bid. There are also essentially 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 may also go through escrow and closing before you can take possession of the property, in spite of the requirement for immediate payment. Accordingly, purchasing an investment property at auction is commonly something only those who can manage to pay cash can administer to carry out.
If you have the capability and desire for risk-taking, buying investment properties at auction can be an efficient technique to grow your portfolio of rental properties, and maybe even discover a bargain along the way. But there is plenty to understand before you choose to buy at auction, making it critical to have industry experts that you can rely on to aid you to resolve whether buying at an auction is the best recourse for you.
At Real Property Management Heritage, we can assist property investors who are thinking about buying their next rental home at auction. We have the means and capital that you can utilize to make the most selection for your investing style and goals. For more information, contact us online or call us at 832-449-5263.
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