Like several rental property investors, your search for a fantastic deal may have you considering buying real estate at an auction. Yet, before your first auction, there are a lot of details you must attend to. There is a lot more danger in buying income properties at auction than getting them in other ways. Real estate auctions aren’t for the faint of heart or hesitant, but with the right information and a strategy, you can help reduce some of that risk. Those comfortable with some risk keep reading to find out the fundamentals of effectively buying a rental home at auction.
Risks and Benefits of Buying a House at Auction
You should be aware that there are risks and benefits to buying an income property at auction. While houses sold at auction are valued below market value, many are in poor condition or have critical 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.
There are a lot of risks of buying at auction such as the possibility of an impulsive overbid and face potential delays after purchase as the property works its way through different organizations, redemption periods in different states or countries, and more.
However, if you want to find real bargains on rental real estate, auctions are a good place to look. When you buy a home at a considerable discount, you can increase your cash flows and overall return on investment. Another perk is that you can take ownership of the property quickly. Typically, auctions can transfer the title to a home within 30 days, allowing you to start planning for your first renter immediately. That means, as opposed to a conventional sale, your property could begin generating rental income considerably more quickly.
How Real Estate Auctions Work
The process 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 minute you discover a potential property, your next move is to learn as much as possible about the property. Remember to conduct a thorough comparative market analysis and appraise the property’s potential as a rental home. If you can, walkthrough or schedule an inspection of the property. If that is not attainable (and often it is not), you could drive by and peek in the windows. It would be great if you did your research. Check for any occupants, liens, or other possible issues that may create roadblocks to ownership.
To bid competitively at an auction, having a large amount of cash on hand and financing lined up before you start to bid is crucial. Generally, to buy a property at auction, you will need no less than 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. Also, there are different types of auctions, so it is important to review all the auction rules thoroughly and be prepared to follow them.
What to Expect at an Auction
Before bidding in a real estate auction, you are required to register and send a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, it is recommended to attend at least an hour before the auction starts to sign in and acquire your official bidding card, which you will use when you bid. You’ll log in to the auction website to bid if the auction is online. The minute the bidding begins, you need to identify 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 be lowered.
In a matter of minutes, you will find out whether you’ve won your auction or not. If you don’t win, you will get a deposit refund. However, if you win, it is essential to pay for the property in full immediately after the sale. Some auctions ask you to bring cash or money order to settle such auctions immediately. Some will offer you a few days, or even the next day, to send in the money. Not doing so will lead to losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so accomplishing payment as requested is important. Then, even if you won the property at auction, you will still go through escrow and closing, just as you would when buying any other property.
Building your investment portfolio, whether at auctions or any other way, can be a difficult but rewarding process. Real Property Management Nampa presents market evaluations and suggestions on potential real estate purchases in Caldwell and nearby. Contact us online or call at 208-960-0660.
Originally Published on Apr 2, 2021
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