Comparable to numerous rental property investors, your hunt for a great deal could lead you to consider buying real estate at an auction. But before your first auction, you should be quite knowledgeable about several things. Buying income properties at auction carries significantly more risk than purchasing them in other ways. Real estate auctions will never be appropriate for the faint-hearted – or risk-averse – investor, even if having strong information and a strategy can help reduce some of that risk. Those comfortable with some risk proceed further to understand the fundamentals of effectively buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
The first thing you should aware of before buying an income property at auction is that the process carries risks and benefits. Although houses sold at auction are priced below market value, several are in poor condition or have major problems 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 include the possibility to overbid in the heat of the moment and face potential delays after purchase as the property moves through several entities, state or country redemption periods, and etc.
On the other hand, auctions are one place 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. Another advantage is that you can take ownership of the property quickly. In many cases, auctions can transfer title to a home within 30 days, allowing you to start planning for your first renter immediately. That means your property could start generating rental income much faster than a traditional sale.
How Real Estate Auctions Work
The act of buying a property at an auction starts by finding real estate auctions. One may achieve this by searching online auction websites or databases or working with a real estate agent specializing in auctions. Finding a potential property marks your next challenge: learning as much as you can about it. Don’t forget to conduct a thorough comparative market analysis and appraise the property’s potential as a rental home. If possible, walkthrough or plan an inspection of the property. If that is impossible – often it is – you could drive past and peep in the windows. It would be great if you could conduct some studies on this topic. Look for any occupants, liens, or other possible issues that may create roadblocks to ownership.
To bid competitively at an auction, having loads of cash on hand and financing in line before you start to bid is vital. Many times, to buy a property at auction, you will need no less than 10% of the selling price for a deposit, the capacity to pay the balance to be paid promptly (or within a matter of days, in some situations), and cash for administrative fees, survey costs, and insurance. Besides, there are different types of auctions, so be sure to thoroughly review all the auction rules and get ready to apply them.
What to Expect at an Auction
Before bidding in a real estate auction, you must register and submit a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, arrange to arrive roughly one hour before the auction commences to verify the information and pick up your official bidding card, which you will use when you bid. You’ll log in to the auction website to bid if the auction is online. Once the bidding starts, you have to know how much you can offer before the property is no longer a bargain. Your risk of paying too much will be substantially less if you can avoid a bidding war.
In minutes, you will find out whether you’ve won your auction or not. Should you lose, you will get a deposit refund. However, if you win, you might have to pay for the property in full immediately after the sale. Certain auctions call for you to bring cash or money order to complete your payment on the spot. Others will let you turn in the necessary money till the following day or several days. Failure to do so will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions; hence, paying as asked is absolutely necessary. Then, even though you won the property at auction, you will still go through escrow and closing, just as you would when buying any other property.
Building your investment portfolio – via auctions or another method – can be a tough but rewarding endeavor. Real Property Management Charlotte Metro provides market evaluations, and guidance on possible real estate purchases in Huntersville and neighboring areas. Contact us online or call at 704-919-1344.
Originally Published on Apr 2, 2021
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.
