If you’re like a lot of rental property investors, you may be looking for a great deal and thinking about buying real estate at an auction. But before your first auction, you need to know a lot of things. Buying income properties at auction is much more risky than acquiring them using any other method. Even though having excellent information and a strategy can help reduce some of that risk, real estate auctions are not for investors who are scared or don’t like taking risks. Those comfortable with some risk proceed further for more information on the basics of successfully buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
Before buying an income property at auction, the first thing you should know is that there are risks and benefits to the process. While houses sold at auction are assessed below market value, a lot of them are in poor condition or have severe problems 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 potential to overbid in a hurry and face potential delays after purchase as the property goes through different groups, state or country redemption periods, and other things.
Conversely, auctions are a great place 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. One more benefit is that you can take ownership of the property quickly. Most of the time, auctions can transfer title to a home within 30 days, allowing you to start planning for your first renter immediately. In simple terms, your property could start generating rental income a lot quicker than if you sold it the old-fashioned way.
How Real Estate Auctions Work
The method of buying a property at an auction begins 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. The next thing you should do when you find a potential property is to learn as much as you can about it. Make sure you do a thorough comparative market analysis and assess the property’s potential as a rental home. If you can, walkthrough or organize an inspection of the property. If that is not attainable (which doesn’t happen very often), you could drive by and peek in the windows. You should really learn more about this. Inspect to see if there are any occupants, liens, or other potential issues that may create roadblocks to ownership.
To bid competitively at an auction, make sure you have a lot of cash on hand and financing lined up before starting bidding. Usually, to buy a property at auction, you will need roughly 10% of the selling price for a deposit, the ability to pay the rest of the money right away (or within a few days, in some cases), and cash for administrative fees, survey costs, and insurance. Also, there are different types of auctions, so make sure you review all the auction rules carefully and be ready to comply with them.
What to Expect at an Auction
Before bidding in a real estate auction, you have to sign up and send a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, get there an hour early to check in and get your official bidding card, which you will use to bid at the auction. You’ll log in to the auction website to bid if the auction is online. Once the bidding starts, you have to understand precisely how much you can offer before the property is eliminated as a bargain. If you can avoid a bidding war, your risk of paying too much will greatly diminish.
You’ll find out right away if you won your auction or not. If you fail to win, you will get a deposit refund. However, if you win, you may necessitate to pay for the property in full immediately after the sale. Some auctions require you to bring cash or money order to complete your payment immediately. Others will let you turn in the money until the next day or over a few days. Failure to do so will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so completing payment as requested is essential. 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 hard but rewarding to add your investment portfolio, whether you do it through auctions or some other method. Real Property Management Assurance gives market evaluations, and tips on possible real estate purchases in Beaverton and adjacent areas. Contact us online or call at 971-270-2600.
Originally Published on Apr 2, 2021
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