Like numerous Cedar Park rental property investors, your search for a good bargain may lead you to consider buying real estate at an auction. However, there are several things you need to understand before your first auction. Buying income properties at auction is far riskier than purchasing them in other ways. Even though having great information and a strategy can help reduce some of that risk, real estate auctions will never be right for the faint-hearted – or risk-averse – investor. Those comfortable with some risk keep reading to know the details of successfully buying a rental home at auction.
Risks and Benefits
Perhaps the primary thing to know before buying an income property at auction is that there are both dangers and advantages involved in the development. While houses sold at auction may seem to be priced below market value, many of them are in poor condition or have serious issues that will necessitate extensive repairs. You may not be able to inspect the property before you buy, so this is one risk that may be difficult to overcome. Other risks of buying at auction include the potential to overbid in the heat of the moment and face potential delays after purchase as the property works its way through various entities, state or country redemption periods, etc.
On the other side, auctions are a perfect place to find bargains when it comes to rental real estate. When you acquire a property at a big discount, that can greatly improve not only your cash flows but the overall return on your investment as well. Another plus is the ability to take possession of the property within a short time. Most of the time, auctions can transfer the title on a property within 30 days, allowing you to begin preparations for your first tenant right away. That signifies your property could begin generating rental income a lot faster compared to a traditional sale.
How It Works
The way of buying a property at an auction starts by finding real estate auctions. This can be accomplished by searching online auction websites or databases or working with a real estate agent specializing in auctions. Once you’ve found a potential property, the following step is to find out as much as you can about the property. Make sure to perform a thorough comparative market analysis and evaluate the property’s potential as a rental home. If feasible, walk through or arrange an inspection of the property. If that is not possible (and usually it is not), you could drive by and peek in the windows. In your research, you must do some inspection. Check if there are any occupants, liens, or other problems that might prohibit you from gaining ownership.
To bid competitively at an auction, you need to have sufficient cash on hand as well as financing lined up before you start to bid. Mainly, to buy a property at auction, you will need at least 10% of the selling price for a deposit, the ability to pay the remaining balance immediately (or within a matter of days, in other cases), and cash for administrative fees, survey costs, and insurance. Furthermore, there are different types of auctions, so make sure to thoroughly study all auction rules and be ready to follow them.
What to Expect
Before you can bid 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, plan to show up about an hour before the auction starts to register and acquire your official bidding card, which you can use when you bid. If the auction is online, you’ll log in to the auction website to make your bid. When the bidding starts, you will need to determine how much you can offer before the property is no longer a bargain. If you can avoid a bidding war, the risk of paying too much will considerably be lowered.
You will know right away whether you’ve won your auction or not. If you don’t win, you will get a refund of your deposit. However, if you win, you will need to pay for the property in full immediately after the sale. Some auctions require you to bring cash or money order with you to complete your payment instantly. Others will give you until the next day, or perhaps several days, to submit the required funds. Failure to do so will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so it’s important to complete 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 rewarding endeavor. Real Property Management All Connect offers free market rent evaluations, and we’re willing to give you advice on any potential properties you’re considering purchasing. You can contact us online or call at 512-806-0606.
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