In your pursuit of a great deal, you may be contemplating buying real estate at an auction, as is the case with many rental property investors. However, there are numerous items that you must be mindful of before your first auction. Buying income properties at auction is much riskier than its acquisition through alternative methods. Although having sound information and a strategy can help reduce some of that risk, real estate auctions will never be recommended for the faint-hearted – or risk-averse – investor. Those comfortable with some risk proceed onward to acquire the basics of successfully buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
The process of buying an income property at auction involve both risks and benefits. While houses sold at auction are priced below market value, many are in poor condition or have serious issues requiring extensive repairs. You may only be able to inspect the property after you buy, so this is one risk that may be difficult to mitigate.
Other risks of buying at auction involve the potential to overbid in the enthusiasm of the moment and face potential delays after purchase as the property is processed via multiple entities, state or country redemption periods, and more.
Alternatively, auctions are a viable source to find real bargains on rental real estate. When you buy a home at a considerable discount, you can increase your cash flows and overall return on investment. One more upside is that you can take ownership of the property quickly. Oftentimes, auctions can transfer title to a home within 30 days, letting you commence planning for your first renter promptly. In other words, your property could commence generating rental income much quicker than a traditional sale.
How Real Estate Auctions Work
Finding real estate auctions is the initial step of buying a property at an auction. This can be accomplished by searching online auction websites or databases or working with a real estate agent specializing in auctions. After identifying a potential property, the subsequent action is to gather as much data as possible about the property. Ensure that you conduct a thorough comparative market analysis and analyze the property’s potential as a rental home. If possible, perform a walkthrough or arrange an inspection of the property. If that is not feasible (which is frequently the case), you could drive by and check the windows. It is advisable to conduct an adequate investigation. Look for any occupants, liens, or other potential obstacles that may create roadblocks to ownership.
To bid competitively at an auction, having plenty of cash on hand and financing lined up before you start to bid is essential. In many cases, to buy a property at auction, you will need at least 10% of the selling price for a deposit, the ability to pay the remaining balance immediately (or within a matter of days, in some cases), and cash for administrative fees, survey costs, and insurance. In addition, there are different types of auctions, so be sure to thoroughly review all the auction rules and be prepared to follow them.
What to Expect at an Auction
Before bidding in a real estate auction, it is imperative to sign up and submit a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, plan to arrive about an hour before the auction starts to register and pick up your official bidding card, which you will utilize to place a bid. You’ll log in to the auction website to bid if the auction is online. Before the bidding commences, it is imperative to ensure that you are aware precisely of how much you can offer before the property is no longer a bargain. If you can avoid a bidding war, your risk of paying too much will considerably minimize.
It will be possible to determine whether or not you have won your auction within minutes. If you don’t win, you will receive a deposit refund. Nonetheless, if you win, you may be required to pay for the property in full immediately after the sale. Some auctions necessitate that you bring cash or money order to finalize your transaction on the spot. Others will grant you an extension of one or more days to submit the needed funds. Failure to comply with this requirement will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions. Therefore, it is imperative that you make the payment as required. Then, even if you won the property at auction, you will still be required to undergo the escrow and closing, just as you would when buying any other property.
Developing your investment portfolio – through auctions or any other approach – can be an intimidating but rewarding undertaking. Real Property Management Three Bridges offers market evaluations as well as counseling on potential real estate purchases in Wentzville and the area around it. Contact us online or call at 636-542-8852.
Originally Published on Apr 2, 2021
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