Like many rental property investors, you may be looking for an excellent value and thinking about buying real estate at an auction. However, you should know a lot before your first auction. Buying income properties at auction is far less secure than purchasing them by other methods. Although having decent information and a strategy can help reduce some of that risk, real estate auctions are not for investors who are afraid or prefer not to take risks. Those comfortable with some risk continue below to find out the basics of successfully buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
Before buying an income property at auction, you should know that there are risks and benefits to the procedure. While houses sold at auction are assessed below market value, many are in poor condition or possess major issues 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 accidentally bidding too much in a hurry and facing potential delays after purchase as the property goes through various entities, state or country redemption times, and additional factors.
On the other hand, auctions are a perfect spot to find real bargains on rental real estate. When you buy a home at a considerable discount, you can increase your cash flows and total return on investment. Another plus is that you can take ownership of the property quickly. A lot of time, auctions can transfer title to a home within 30 days, so you can start planning for your first renter right away. That signifies that your property might begin generating rental income much sooner than a traditional sale.
How Real Estate Auctions Work
The process of buying a property at an auction begins by finding real estate auctions. This can be completed by searching online auction websites or databases or working with a real estate agent specializing in auctions. As soon as you discover a potential property, you should learn as much as you can about it. Make sure you perform a thorough comparative market analysis and estimate the property’s potential as a rental home. If attainable, walkthrough or conduct an inspection of the property. If that is not achievable (and often it is not), you could drive by and peek in the windows. It would be smart of you to learn more. Make sure there aren’t occupants, liens, or other issues that could make roadblocks to ownership.
To bid competitively at an auction, you need to have a lot of cash on hand and financing lined up before you start bidding. In most situations, to buy a property at auction, you will need a minimum of 10% of the selling price for a deposit, the ability to pay the outstanding balance directly (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 attentively review all the auction rules and be prepared to comply with 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, prepare to get there an hour before the auction begins to register and get 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. As soon as the bidding commences, you need to determine precisely how much you can offer before the property is no longer a bargain. If you can avoid a bidding war, your risk of paying too much will significantly lessen.
You will find out quickly whether you’ve won your auction or not. If you don’t win, you’ll get a deposit refund. Yet, if you win, you may have to pay for the property in full immediately after the sale. At some auctions, you need to bring cash or money order to complete your payment right away. Some will give you until the next day or a few days to send the money. Not doing this will cause you to lose the sale, forfeit your deposit, and even be banned from participating in future auctions, so it is very important that you make the payment as requested. 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.
Growing your investment portfolio – through auctions or any other means – can be a challenging but fulfilling endeavor. Real Property Management All Connect offers market evaluations, and advice on potential real estate purchases in Cedar Park and nearby. Contact us online or call at 512-806-0606.
Originally Published on Apr 2, 2021
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