For real estate investors, there are pros and cons of buying rental property at auction. While auctions can provide new ways to acquire investment properties and maybe improve your odds of detecting an impressive deal, buying at auction can likewise be far riskier than obtaining properties in different methods.
Having restricted time and knowledge about the properties for auction, the chances of making a very expensive mistake are high. There are countless approaches to mitigate that risk, but nevertheless, you should identify as much as you can regarding residential property auctions before determining whether obtaining your subsequent investment property in this manner is good for you.
There are innumerable determinants of why a residential property may end up in an auction. For instance, if the homeowner fails to pay their property taxes, the tax authority may seize the property and conduct a tax lien auction to recover the taxes owed to them. In a different regular setting, the homeowner loses the house due to the nonpayment of the mortgage loan or owner association assessments.
When a homeowner defaults on his or her mortgage and the lender is unable to reach an acceptable arrangement with them, the property commonly ends up in the foreclosure process. Possession of the property is reclaimed by the lender, and the property is often sold off at auction. These foreclosure auctions are usually overseen by trustees that work for the bank or the lender who holds the mortgage loan.
What makes buying these types of properties so risky is that the full details of their condition are often unknown. Occasionally, the bank or lender may not even allow you to have a professional inspection done on the property before bidding, or even let you look at the property yourself. It is normal for the previous possessor to have neglected to perform routine maintenance and even significant repairs on the property, often due to a lack of funds. The former owner may even have intentionally damaged the property out of spite, sometimes stripping the house of any element that might have the slightest value – appliances, lightbulbs, doorknobs, even cabinets, and fixtures.
If the property has been vacant for some time, it may also have been vandalized or had squatters living in it. Without a means to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can chat with neighbors, real estate agents, and search local records for details, which may be useful as a guide. Besides the physical condition of the house, when dealing with foreclosures there is a high chance that the property has liens against it or other encumbrances that would need to be paid off before you could purchase it. If you are not inclined to pay these costs and make significant repairs to the property, buying at auction may not be your best option.
The process of bidding in an auction is also something that you must fathom before venturing to procure a property this way. In many situations, to bid in an auction you will need to register for it in advance and submit a refundable deposit of between 5% and 10% of the property’s expected selling price to the bank or lender. Some auctions are held in person, while others may be conducted online.
Regardless, once the bidding commences you’ll have to discern how real estate auctions typically operate. In some instances, the lender is not required to accept your offer even if you are the highest bidder. As a rule, the starting price is the amount owed to the bank or lender; in other issues, the starting price may be considerably curtailed to increase the auction’s chances of success. The auctioneer could also set a hidden reserve price on the property, which denotes that if the bidding does not meet or exceed that amount, the property will not be sold, regardless of who wins.
Financing a property at auction is different from other situations in one significant way: you must carry cash, a money order, or a cashier’s check with you and pay for the property in full immediately upon winning it. Though a few auctions do allow financed purchases, at the very least you will still have to be prequalified before you can bid. There are also essentially auction fees that must be waged.
Auctioneers, banks, attorneys, and other entities who have incurred debt during or after the foreclosure and auction process may often require payment in full before you can finalize the sale of your property. You should also go through escrow and closing before you can take possession of the property, in spite of the requirement for immediate payment. As a consequence, acquiring an investment property at auction is normally something only those who can manage to pay for cash can do.
If you have a way and penchant for risk-taking, buying investment properties at auction can be a beneficial way to grow your portfolio of rental properties, and maybe even discover a good deal in the process. But there is a lot to comprehend before you buy at auction, making it crucial to get trade experts that can help you decide if buying at an auction is the best decision for you.
At Real Property Management Boston, we can assist property investors when buying their next rental home at auction. We possess the tools and finances that you can wield to create the best ideal option for your investing style and goals. For more information, contact us online or call us at 617-522-0099.
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