For real estate investors, there are both pros and cons to buying a rental property at auction. While auctions can provide opportunities to acquire investment properties and increase your chances of finding a great bargain, buying at auction can be far riskier than buying properties in other ways.
With limited time and information about the properties for sale, the chances of making a costly mistake are high. There are ways to mitigate that risk, but you should learn as much as possible about residential property auctions before deciding whether buying your next investment property this way is right for you.
Why might a residential property end up in an auction?
Residential properties may be auctioned for various reasons, such as unpaid property taxes leading to tax lien auctions or homeowners losing their homes due to mortgage or homeowners association fee defaults.
When a homeowner defaults on their mortgage and the lender cannot reach a suitable agreement with them, the property often ends up facing foreclosure. The lender repossesses the property, and it is typically sold at auction. These foreclosure auctions are usually managed by trustees working for the bank or lender that owns the mortgage.
Why is buying real estate at auction risky?
Purchasing these types of properties is risky because the full details of their condition are often unknown. In some cases, the bank or lender may not permit a professional inspection of the property before bidding or even allow you to walk around the property. Previous owners frequently neglect routine upkeep and necessary repairs due to financial hardship. In some instances, they may intentionally damage the property by removing valuable items like appliances, light fixtures, and hardware.
If the property has been unoccupied for a while, it may have been vandalized or housed squatters. Without the ability to legally enter the property to evaluate its condition, buying a property at auction will always carry some risk. Speaking with neighbors, consulting real estate agents, and researching local records can provide helpful insights.
Beyond the physical condition of the house, foreclosures often come with additional complications, such as liens or other encumbrances that must be resolved before you can complete the purchase. If you are not ready to cover these costs and address major repairs, buying at auction might not be the ideal choice for you.
What is the process of bidding on real estate?
Understanding the auction process is essential before attempting to buy a property this way. To participate in an auction, you typically need to register in advance and provide a refundable deposit of 5% to 10% of the property’s anticipated selling price. Auctions can take place either in person or online.
Either way, once the bidding starts, you’ll need to understand how real estate auctions typically work. Sometimes, the lender is not obligated to accept your bid, even if you are the highest bidder. The starting price often reflects the amount owed to the bank or lender, although in some cases, it may be much lower to enhance the auction’s success. The auctioneer may also set a hidden reserve price, meaning that if bids do not reach or exceed that amount, the property will not be sold, regardless of the highest bid.
Financing a property at auction can be challenging because you are typically required to pay the full amount immediately after winning, using cash, a money order, or a cashier’s check. Although some auctions allow financed purchases, preapproval is generally required beforehand. Auction-related fees also usually apply.
How are real estate auctions finalized?
Auctioneers, banks, attorneys, and other involved entities that have incurred expenses during or after the foreclosure and auction process often require full payment before the sale of the property is finalized. Additionally, you must complete the escrow and closing process before taking ownership of the property, even though immediate payment is required.
For these reasons, purchasing an investment property at auction is generally feasible only for those with sufficient cash reserves.
If you have the resources and a willingness to take calculated risks, buying investment properties at auction can be a practical way to grow your portfolio of rental properties and secure a favorable deal in the process. However, there is a lot to learn before deciding to purchase at an auction, so it’s crucial to work with trusted industry professionals who can help you determine whether this strategy aligns with your goals.
At Real Property Management Boston, we assist property investors considering buying their next rental home at auction. We provide the tools and resources to help you make the most informed decision for your investment strategy in Brookline and surrounding areas. For more information, contact us online or at 617-522-0099.
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