Like most Granbury rental property investors, your hunt for a great bargain may have you considering buying real estate at an auction. However, there are plenty of things you need to figure out before your first auction. Buying income properties at auction is far riskier than getting them through other methods. Even though containing good 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 absorb the principles of successfully buying a rental home at auction.
Risks and Benefits
Before anything else, when buying an income property at auction, you need to remember that there are both pros and cons included in the process. Though houses sold at auction may seem to be priced below market value, many of them are in poor condition or have terrible problems that necessitate costly repairs. You may not be able to inspect the property before you buy, so this is one risk that can be hard to avoid. Other risks of buying at auction include the potential to overbid in the heat of the moment and as well as unnecessary delays after purchase due to the property’s dealings with various entities, state or country redemption periods, and more.
On the plus side, auctions are a great place to find real bargains on rental real estate. When you purchase a property at a significant discount, not just the cash flows but the total return on your investment can be boosted significantly. Another benefit is the potential to take possession of the property within a short time. Commonly, auctions can transfer the title on a property within 30 days, allowing you to begin preparations for your first tenant quickly. That signifies your property could start generating rental income a lot quicker compared to a traditional sale.
How It Works
The process of buying a property at an auction starts by finding real estate auctions. This can be possible by searching online auction websites or databases or dealing with a real estate agent specializing in auctions. Once you come up with a potential property, your next move is to find out as much as you can about the property. Make sure to conduct a comprehensive comparative market analysis and evaluate the property’s potential as a rental home. If achievable, 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 should do your investigation. Check if there are any occupants, liens, or other possible concerns that may create roadblocks to ownership.
To bid competitively at an auction, you should have a sufficient amount of cash on hand as well as financing lined up before you start to bid. Most of the time, 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 some cases), and cash for administrative fees, survey costs, and insurance. On top of that, there are different types of auctions, so you must carefully review and be prepared to obey the entirety of the auction rules.
What to Expect
Before you can bid in a real estate auction, you will need to register and submit a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, you need to arrive about an hour before the auction starts to register and get your official bidding card, which you will use when you bid. If the auction is online, you’ll log in to the auction website to make your bid. Once the bidding gets going, you will need to determine exactly how much you can offer before the property is no longer a bargain. If you can skip a bidding war, the probability of paying too much will be reduced significantly.
You will know whether you’ve won your auction or not quickly. If you don’t win, you will get a refund of your deposit. However, if you win, you may 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 settle your payment on the spot. Others will give you a few days, or perhaps another week, to submit the required funds. Failure to do so will lead to losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so it’s essential 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 complicated but satisfying undertaking. Real Property Management Trailhead 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 817-930-1160.
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