For real estate investors, there are various pros and cons of buying a rental property at auction. Even though auctions can provide new ways to acquire investment properties and hypothetically develop your likelihood of ascertaining a tremendous deal, buying at auction can also be far riskier than spending for properties in some other ways.
Having constrained time and data about the properties for auction, the chances of making a very expensive mistake are high. There are limitless tactics to mitigate that risk, but nevertheless, you should identify as much as you can regarding residential property auctions before deciding whether finding your next investment property through this method is good for you.
There are numerous reasons 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 owners association assessments.
When a homeowner defaults on his or her mortgage and the lender is not capable of reaching an acceptable arrangement with them, the property is 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. Sometimes, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even permit you to examine the property yourself. It is not uncommon 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.
Supposing that the property has been vacant for some time, it may also have been vandalized or had squatters living in it. Since you may not be able 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 information, which may assist in making an informed decision. 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 motivated 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 something that you need to learn before taking on the responsibility of obtaining a property in this manner. In certain 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.
In any case, as soon as the bidding begins you’ll see how real estate auctions naturally function. In some situations, the lender is not required to accept your offer even if you are the highest bidder. Normally, the starting price is the amount owed to the bank or lender; in other situations, the starting price may be substantially lower 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: often, you must carry cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. Although a few auctions do allow financed purchases, at the very least you will be mandated to be prequalified before you can bid. There are also auction fees that must be paid off.
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, in spite of the requirement for immediate payment. Accordingly, purchasing an investment property at auction is commonly something only those who can manage to pay cash can administer to carry out.
If you have the means and a disposition for risk-taking, buying investment properties at auction can be a proficient system to grow your portfolio of rental properties, and maybe even find a steal in the process. But there is a lot to learn before buying at an auction, making it essential to include business experts that you can rely upon to help you determine whether buying at an auction is the right choice for you.
In Real Property Management Bozeman, we can assist property investors who are considering buying their next rental home at auction. We have the equipment and assets that you can harness to make the best decision for your investing style and goals. For more details, contact us online or call us at 406-586-2226.
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