The fact for real estate investors is that there are both pros and cons to buying rental property at auction. While auctions can deliver new ways to acquire investment properties and may further increase your likelihood of obtaining a great deal, buying at auction can be far riskier than purchasing properties in other ways.
With no sufficient time and information concerning the properties that are being sold, the chances of making a very expensive mistake are high. There are numerous ways to mitigate that risk, however, even then, you should take in as much as you can about residential property auctions before concluding as to whether or not buying your next investment property this method is fitting for you.
There are different reasons 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 one other ordinary case, the homeowner loses the house due to the nonpayment of the mortgage loan or owners association assessments.
Whenever a homeowner default on his or her mortgage and the lender fails to reach an acceptable arrangement with them, the property would be subject to 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 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. In some terms, the bank or lender may not even allow you to have a professional inspection done on the property before bidding or even permit you to look around the property yourself. It is not uncommon for the previous owner 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 quite some time, it may also have been vandalized or had squatters living in it. Without a way to legally get inside the property to assess its condition, buying a property at auction is always going to be a risk. You can speak to neighbors, real estate agents, and search local records for information, which could help. Past 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 willing 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 one point that you need to learn before trying to buy a property this way. In many circumstances, 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.
But, as soon as the bidding starts, you’ll need to know how real estate auctions typically work. In some circumstances, the lender is not required to accept your offer even if you are the highest bidder. Often, the starting price is the amount owed to the bank or lender; in other cases, the starting price may be lower to increase the auction’s chances of success. The auctioneer may also set a hidden reserve price on the property, which implies 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: most of the time, 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. While some auctions do allow financed purchases, at a minimum, you will still need to be prequalified before you can bid. There are also typically auction fees that have to be paid.
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 must also go through escrow and closing before you can take possession of the property, despite the requirement for immediate payment. Because of this, buying an investment property at auction usually is something only those who can pay cash can manage to do.
If you have the means and an urge for risk-taking, buying investment properties at auction can be a beneficial way to grow your portfolio of rental properties, and possibly even discover a great deal in the process. But there is a lot to know before you decide to buy at auction, making it necessary to have industry professionals that you can trust to help you decide whether buying at an auction is the right option for you.
At Real Property Management Chicago Edge, we can assist property investors thinking about buying their next rental home at auction. We have the tools and resources that you can use to make the best viable choice for your investing style and goals. For more information, contact us online or call us at 773-904-7700.
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