For real estate investors, there are some pros and cons to buying rental property at auction. While auctions can deliver new ways to acquire investment properties and conceivably build your chances of uncovering an excellent deal, buying at auction can also be far riskier than procuring properties through other methods.
With limited time and data about the properties for sale, the chances of making a very expensive mistake are high. There are several ways to mitigate that risk, but even so, you must also study as much as you can concerning residential property auctions before establishing whether purchasing your next investment property this way is sensible for you.
There are myriad of 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 becomes 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 hold the mortgage loan.
What makes buying these types of properties so risky is that the full details of their condition are often unknown. In some conditions, 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 look at the property yourself. It is very customary for the initial 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.
Once the property has been vacant for some time, there’s a possibility that it was 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 ask the neighbors, real estate agents, and search local records for insights, which may guide you. 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 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 additionally something that you must be compelled to understand before endeavoring to buy a property this way. As a rule, 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. Certain auctions are held in person, while others may be conducted online.
Despite everything, once the bidding proceeds you’ll see how real estate auctions routinely perform. In fact, 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; sometimes, the starting price may be appreciably cheaper to increase the auction’s chances of success. The auctioneer may also set a hidden reserve price on the property, which means 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: 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. While there are auctions that allow financed purchases, at the very least, you will still have to be prequalified before you can bid. There are also auction fees that must be paid for.
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 need to also go through escrow and closing before you can take possession of the property, even with the requirement for immediate payment. Consequently, buying an investment property at auction is generally something only those who can afford to pay cash can be able to do.
If you have the means and a disposition for risk-taking, buying investment properties at auction can be an adequate plan to grow your portfolio of rental properties, and maybe even find an exceptional deal in the process. But there is a lot to know before you aim to buy at auction, ensuring you have business experts that you can depend on to assist you in deciding whether buying at an auction is an accurate course of action for you.
At Real Property Management Cache Valley, we can assist property investors who are buying their next rental home at auction. We have the proficiency and amenities that you can apply to make the best absolute alternative for your investing style and goals. For more information, contact us online or call us at 435-753-5200.
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