The fact for real estate investors is that there are both pros and cons to buying rental property at auction. Although auctions can deliver new ways to acquire investment properties and may further increase your likelihood of obtaining a great deal, buying at auction can be far riskier than getting properties in other ways.
With no adequate time and knowledge involving the properties that are being sold, the chances of making a very expensive mistake are high. There are various ways to mitigate that risk, however, even then, you should understand as much as you can about residential property auctions before concluding as to whether or not buying your next investment property this method is fitting for you.
There are varying causes 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 one other regular occurrence, the homeowner loses the house due to the nonpayment of the mortgage loan or owners association assessments.
In the event a homeowner defaults on his or her mortgage and the lender can’t come to an acceptable arrangement with them, the property would 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 because the full details of their condition are often unknown. In some terms, 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 not rare 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.
If the property has been vacant for quite some time, there’s a big possibility it may also 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 could 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 not ready 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 one thing that you need to master before attempting to buy a property this way. In many situations, 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.
However, as soon as the bidding starts, you’ll need to recognize how real estate auctions typically work. In some incidents, the lender is not required to accept your offer even if you are the highest bidder. Usually, the starting price is the amount owed to the bank or lender; in other cases, the starting price may be cheaper to increase the auction’s chances of success. The auctioneer may also set a hidden reserve price on the property, which indicates 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: the majority 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 a minimum, you will still need to be prequalified before you can bid. There are also the usual auction fees that ought to 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 also need to go through escrow and closing before you can take possession of the property, notwithstanding the requirement for immediate payment. That’s why acquiring an investment property at auction usually is something only those who can pay cash can achieve.
If you have the means and an urge for risk-taking, buying investment properties at auction can be a helpful way to grow your portfolio of rental properties, and perhaps even win a great deal in the process. Still, there is more that needs to be learned before you decide to buy at auction, making it crucial to have industry professionals that you can trust to help you decide whether buying at an auction is the right option for you.
At Real Property Management Washington DC, we can assist property investors who are thinking about buying their next rental home at auction. We have the tools and resources that you can use to make the best choice for your investing style and goals. For more information, contact us online or call us at 202-813-9993.
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