For real estate investors, there remain both pros and cons to buying a rental property at auction. While auctions can offer new ways to acquire investment properties and possibly increase your chances of discovering an excellent bargain, buying at auction can also be far riskier than purchasing properties in other approaches.
With insufficient time and knowledge regarding the properties for sale, the chances of making a very expensive mistake are high. There are countless techniques to mitigate that risk; still, you should discover as much as you can regarding residential property auctions before determining whether buying your next investment property this way is best for you.
There are numerous reasons why a residential property may end up in an auction. 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 familiar situation, the homeowner loses the house due to the nonpayment of the mortgage loan or owners association assessments.
If a homeowner default on his or her mortgage and the lender is unable to attain an acceptable arrangement with them, the property typically ends up 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 because the full details of their condition are often unknown. In some instances, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even let you look around the property yourself. It is likely that the previous owner has 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 some time, it could probably have been vandalized or had squatters living in it. Without 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 speak to neighbors, real estate agents, and search local records for information, which may help. Past 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 hesitant 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 understand before trying to buy a property this way. In many instances, 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. Some auctions are held in person, while others may be conducted online.
Moreover, as soon as the bidding starts, you’ll need to recognize how real estate auctions naturally work. In some situations, the lender is not required to accept your offer even if you are the highest bidder. Often, the starting price is the amount owed to the bank or lender; other times, the starting price may be significantly lower to increase the auction’s chances of success. The auctioneer may also set a hidden reserve price on the property, which implies 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: most of the time, you must bring cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. While some auctions do allow financed purchases, at the very least, you will still need to be prequalified before you can bid. There are also the usual 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 must also go through escrow and closing before you can take possession of the property, despite the requirement for immediate payment. For this reason, buying an investment property at auction is usually one thing only those who can afford to pay cash can successfully do.
In case you have the means and have the aptitude for risk-taking, buying investment properties at auction can be an effective way to grow your portfolio of rental properties, and maybe even find a great deal in the procedure. But there is a lot to know prior to deciding to buy at auction, making it essential to have industry professionals that you can count on to help you decide whether buying at an auction is the right option for you.
At Real Property Management Charleston, we can assist property investors thinking about buying their next rental home at auction. We have the tools and resources that you can use to make the best possible choice for your investing style and goals. For more information, contact us online or call us at 843-900-4061.
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