Like many rental property investors, your hunt for a great bargain may have you contemplating buying real estate at an auction. However, there are several aspects you need to know before your first auction. Buying income properties at auction is far more unsafe than acquiring them in other ways. Although having solid information and a strategy can help reduce some of that risk, real estate auctions will always be unsuitable for the faint-hearted – or risk-averse – investor. Those comfortable with some risk keep reading to find out the basics of successfully buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
The first thing to understand before buying an income property at auction is that the process incorporates risks and benefits. While houses sold at auction are priced below market value, many are in poor condition or have severe 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 the possibility to overbid in the heat of the moment and face potential delays after purchase as the property works its way through numerous institutions, state or country redemption periods, and so on.
Conversely, auctions are one 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 overall return on investment. Another plus is that you can take ownership of the property quickly. In many scenarios, auctions can transfer title to a home within 30 days, permitting you to start planning for your first renter immediately. That suggests your property could start generating rental income much faster than a old-style sale.
How Real Estate Auctions Work
The process of buying a property at an auction starts by finding real estate auctions. This can be achieved by searching online auction websites or databases or working with a real estate agent specializing in auctions. After you find a potential property, your next step is to learn as much as possible about the property. Remember to do a thorough comparative market analysis and evaluate the property’s potential as a rental home. If possible, walkthrough or arrange an inspection of the property. If that is impossible (and often it is not), you could drive by and peek in the windows. It would be a great idea if you did your investigation. Inspect for any occupants, liens, or other potential issues that may create roadblocks to ownership.
To bid competitively at an auction, having a lot of cash on hand and financing lined up before you begin to bid is essential. In many cases, to buy a property at auction, you will need at least 10% of the selling price for a deposit, the capability to pay the outstanding balance directly (or within a matter of days, in some cases), and cash for administrative fees, survey costs, and insurance. Furthermore, there are different types of auctions, so be sure to meticulously review all the auction rules and be prepared to adhere to them.
What to Expect at an Auction
Before bidding in a real estate auction, registration is a must, along with a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, strive to attend about an hour before the auction starts to check in and get your official bidding card, which you will utilize when you bid. You’ll log in to the auction website to bid if the auction is online. As soon as the bidding begins, you must understand 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 greatly diminish.
You will find out within minutes whether you’ve won your auction or not. If you don’t win, you will acquire a deposit refund. However, if you succeed, you may need to pay for the property in full immediately after the sale. Some auctions necessitate you to bring cash or money order to complete your payment then and there. Others will give you until the next day or several days to provide the necessary funds. Refusing to do so will bring about losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so finalizing payment as demanded is vital. Afterward, although you won the property at auction, you will still go through escrow and closing, just as you would when buying any other property.
Increasing your investment portfolio – through auctions or any other means – can be a demanding but enjoyable endeavor. Real Property Management Lakeside delivers market evaluations, and advice on potential real estate purchases in Davenport and nearby. Contact us online or call at 863-877-1078.
Originally Published on Apr 2, 2021
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