For real estate investors, there are several pros and cons to buying a rental property at auction. Regardless, auctions can offer new ways to acquire investment properties and maybe multiply your percentage of finding a remarkable deal, buying at auction can also be far riskier than buying properties in the usual ways.
By having limited information and experience about the properties for sale, the chances of making a very expensive mistake are high. There are multiple strategies to mitigate that risk, but even so, you should learn all that you can about residential property auctions before determining if paying for your next investment property this way is the best choice for you.
There are a myriad of explanations 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 other circumstances, the homeowner loses the house due to the nonpayment of the mortgage loan or owner association assessments.
As soon as a homeowner defaults on his or her mortgage and the lender is unable to achieve an acceptable arrangement with them, the property will be 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 that the full details of their condition are often unknown. Oftentimes, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even authorize you to look around the property yourself. It is normal for the previous owner 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.
Assuming that the property has been vacant for some time, it may also have been vandalized or had squatters living in it. Needing 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 talk to neighbors, real estate agents, and search local records for knowledge, which may assist. Except for 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 inclined 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 something that you should understand before attempting to acquire a property this approach. Also, 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. Numerous auctions are held in person, while others may be conducted online.
Regardless, when the bidding kicks off, you must consider how real estate auctions also work. Frequently, the lender is not required to accept your offer even if you are the highest bidder. In addition, the starting price is the amount owed to the bank or lender; in other scenarios, the starting price may be crucially reduced to increase the auction’s chances of success. The auctioneer may also have put a hidden reserve price on the property, which means that when 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: constantly, you must have cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. While numerous auctions do allow financed purchases, at the very least, you will still need to be prequalified before you can bid. There are also routinely auction fees that should be rewarded.
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 should also go through escrow and closing before you can take possession of the property, against the requirement for immediate payment. Consequently, acquiring an investment property at auction is frequently something only those who can bear to pay cash can afford to do.
If you have the solution and a penchant for risk-taking, buying investment properties at auction can be a practical scheme to grow your portfolio of rental properties, and maybe even notice a great deal in the process. But there is plenty to realize before you try to buy at auction, making it a need to have industry experts that you can depend on to guide you whether buying at an auction is the proper choice for you.
At Real Property Management East Valley, we would assist property investors who are considering about buying their next rental home at auction. We possess the tools and means that you can operate to make the best decision for your investing style and goals. For more information, contact us online or call us at 480-658-0869.
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