Like many Wentzville rental property investors, your desire for a good bargain may have driven you to consider buying real estate at an auction. But there are several things you need to understand before your first auction. Buying income properties at auction is far riskier than any other method of acquisition. While having good information and a strategy can help reduce some of that risk, real estate auctions will never be right for the faint-hearted – or risk-averse – investor. Those comfortable with some risk keep reading to find out the essentials of successfully buying a rental home at auction.
Risks and Benefits
Maybe the most important thing to remember before buying an income property at auction is that both risks and advantages are included in the process. While houses sold at auction may tend to be priced below market value, many of them are in poor condition or have major problems that will require comprehensive repairs. You will not be able to inspect the property before you buy, so this is one risk that may be difficult to prevent. One more risk when buying at auction include the potential to overbid in the heat of the moment and also potential delays after purchase as the property works its way through numerous entities, state or country redemption periods, and so forth.
On the other hand, auctions are a great way to locate great bargains on rental real estate. When you purchase a property at a big discount, you will boost not just your cash flows but also the overall return on your investment as well. Another advantage is the ability to take possession of the property within a short time. In many cases, auctions can transfer the title on a property within 30 days, allowing you to begin preparations for your first tenant promptly. That means your property could start generating rental income much faster than a traditional sale.
How It Works
The development of buying a property at an auction begins by finding real estate auctions. This can be accomplished by searching online auction websites or databases or engaging with a real estate agent specializing in auctions. Once you discover a potential property, the following task is to find out as much as you can about the property. Don’t forget to do a full comparative market analysis and evaluate the property’s potential as a rental home. Desirably, walk through or arrange an inspection of the property. If it isn’t possible (because it isn’t always), you could drive by and peek in the windows. In your research, you have to do your investigation. Check to see whether there are any occupants, liens, or other possible issues that might prevent you from obtaining possession.
To bid competitively at an auction, you need to have sufficient cash on hand as well as financing lined up before you start to bid. In several situations, 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. Moreover, there are different types of auctions, so be sure to carefully read all of the auction rules and be prepared to obey them.
What to Expect
Before you can bid in a real estate auction, you have to register and submit a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, prepare to come about an hour before the auction starts to sign in and get your official bidding card, which you will use when you bid. If the auction is online, you’ll log in to the auction website to make your bid. Once the bidding opens, you will need to determine exactly how much you can offer before the property is no longer a bargain. If you can prevent a bidding war, the probabilities of paying too much will be reduced dramatically.
You will know in just a few minutes whether you’ve won your auction or not. If you don’t win, you will receive a refund of your deposit. Nevertheless, if you win, you will be required to pay for the property in full immediately after the sale. Other auctions require you to bring cash or a money order with you to make your payment then and there. Others will allow you until the day after, or possibly a few days, to send the required funds. Failure to do so will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so it’s imperative to complete payment as demanded. After that, although you won the property at auction, you will still go through escrow and closing, just as you would when buying any other property.
Growing your investment portfolio – through auctions or any other means – can be a difficult but rewarding undertaking. Real Property Management Three Bridges offers free market rent evaluations, and we’re willing to give you advice on any potential properties you’re considering purchasing. You can contact us online or call at 636-542-8852.
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