You may be thinking about buying real estate at an auction as you look for a great bargain, as many rental property investors do. But before your first auction, you need to learn a lot of things. Buying income properties at auction carries a much higher risk than other methods of acquisition. Real estate auctions are not for timid or risk-averse investors, despite the fact that having good information and a strategy can help reduce some of that risk. For those comfortable with some risk, the following information will provide a comprehensive overview of the fundamentals of buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
Before buying an income property at auction, it is important to understand the risks and benefits of the process. Although the prices of houses sold at auction are below market value, a significant number of them are in poor condition or have severe problems requiring extensive repairs. This is one risk that may be difficult to mitigate, as you might only be able to inspect the property after you buy.
Other risks of buying at auction include the potential to overbid in the fervor of the moment and face potential delays after purchase as the property works its way through different entities, state or country redemption periods, and more.
However, the best way to find real bargains on rental real estate is at auctions. When you buy a home at a considerable discount, you can increase your cash flows and overall return on investment. You can take ownership of the property quickly, which is another benefit. Mostly, auctions can transfer the title to a home within 30 days, enabling you to begin planning for your first renter straight away. This indicates your property could commence generating rental income more quickly than a conventional sale.
How Real Estate Auctions Work
Finding real estate auctions is the first step in buying a property at an auction procedure. This can be accomplished by searching online auction websites or databases or working with a real estate agent specializing in auctions. Upon locating a potential property, the subsequent action is to gather as much information as possible about the property. Make sure to conduct a thorough comparative market analysis and evaluate the property’s potential as a rental home. Perform a walkthrough or schedule an inspection of the property if feasible. In the event that this is not feasible (which is a common occurrence), you could drive by and observe the windows. Conducting an investigation would be in your best interest. Inspect the property for any potential roadblocks to ownership, such as occupants, liens, or other potential issues.
To bid competitively at an auction, it is vital to have enough cash on hand and financing secured prior to commencing bidding. In many cases, 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. Additionally, there are different types of auctions, so be sure to carefully review all the auction rules and be prepared to adhere to them.
What to Expect at an Auction
A refundable deposit of 5% to 10% of the property’s expected selling price must be submitted prior to bidding in a real estate auction. If the auction is in person, it is recommended that you attend approximately one hour prior to the commencement of the auction to register and obtain your official bidding card, which you will utilize to place your bid. If the auction is presently online, you’ll log in to the auction website to place an offer. Once the bidding has begun, you must know exactly how much you can offer before the property is no longer a bargain. Your risk of paying too much will be significantly reduced if you can avoid a bidding war.
Whether you’ve won your auction or not, you’ll know within minutes. A deposit refund will be issued in the event that you do not win. However, if you are successful, you may be necessitated to pay for the property in full immediately after the sale. To make your payment in person at some auctions, you must bring cash or money order. Some individuals will grant you an extension of one or more days to submit the necessary funds. Completion of the payment as requested is imperative, as failure to do so will lead to losing the sale, forfeiting your deposit, and even being banned from participating in future auctions. 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.
It can be challenging but rewarding endeavor to expand your investment portfolio, whether through auctions or any other method. Real Property Management Trailhead offers market evaluations, along with information on prospective real estate purchases in Granbury and nearby. Contact us online or call at 817-930-1160.
Originally Published on Apr 2, 2021
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