If you want to acquire an investment property, you must be willing to seek it in places you might not have thought of before. While many novice real estate investors use standard methods to discover properties, such as the MLS or outbound marketing, there is one method that may yield a high return on investment with little promotion: auctions. Attending local auctions may result in a genuinely fantastic deal for patient investors, so how does a home auction work? Better still, how can today’s investors turn to buy a property at auction into a once-in-a-lifetime opportunity?
Unfortunately, many novice investors are afraid of bidding at auctions and are unaware of how to make an offer on an REO (real estate owned) property. Fortunately, the foreclosure auctions process does not have to be daunting, and investors should not shun it. Instead, do some research on buying a property at auction. This allows investors to get answers to their most pressing questions: How does a real estate auction work? How can one participate in a real estate auction? What can you do to improve your odds of finding a winner?
Here’s a rundown of the real estate auction procedure to make sure you’re ready when the bidding begins.
Everything You Should Know About Purchasing Auctioned Homes
Everything you need to know about buying auctioned properties is available to you; you just need to know where to look. If nothing else, purchasing a property at auction isn’t any more difficult than a typical sale (at least not for those who complete the proper measures), it’s simply different. And, as you are probably aware, different does not imply tougher; it simply means you must approach the problem from a different perspective.
How Does The Real Estate Auction Process Work?
I can’t emphasize this enough: the real estate auction process isn’t any more difficult than a typical property purchase – it’s just different. The more comfortable you grow with the real estate auction process, the easier it becomes. Having said that, there’s no reason you shouldn’t look into buying properties at auctions; they offer some fantastic discounts. And if that seems like something you’d be interested in, here’s a rundown of what you can anticipate.
Typically, auctions will take place at a local courtroom. Sometimes auction organisers will find another site that comfortably accommodates the estimated number of auction participants. (The objective is always to obtain the most money back for the lender.) Tax lien auctions, on the other hand, are commonly monitored and handled by the local sheriff because the seller is frequently the government.
Each auction has a beginning bid, which is generally determined by the total amount outstanding. If the original bid is not reached, the property is often put aside and retained by the lender or government for future sale in another manner.
Normal auction rules apply as long as the initial bid is satisfied. The highest bidder who can fulfill the auction criteria, such as a cashier’s check or payment within “X” number of hours, wins and obtains the paperwork to assume possession of the property.
When an investor has paid in full, they will be given a certificate of sale. And within at least 10 days, often sooner, they will be mailed a certificate of title.
Why Does Property Go To Auction?
There are various reasons why a home could be put up for an auction; the real estate auction procedure will differ differently based on why that particular house is being auctioned. The two most prevalent causes for a house being auctioned are foreclosure and tax liens.
A foreclosure auction takes place after the previous owner failed to make payments for several months and the bank or lender “foreclosed” or took ownership of the property. In this case, the original lender sells the home, setting the beginning bid—usually, the amount owing plus fees and charges. Auction participants can then make that bid, or a greater bid, to start the auction.
A tax lien auction is similar, except that the property is taken as a result of unpaid taxes or tax fraud. In this scenario, the lien is being sold. If the lien is not paid, the owner of the lien has the right to collect it from the property owner or take the property. (Note: Tax lien investing is a complex approach in and of itself.
What To Look For In A House At Auction
Prospective purchasers of auction properties must conduct just as much due research as typical purchases, if not more. If nothing else, the aim is the same: to purchase a property that can be rehabbed and resold for a profit greater than the initial purchase price. That implies that anyone purchasing a property at auction must consider every element that they would consider when purchasing a home through regular channels. However, auction residences coincide with extra factors that purchasers must consider. People purchasing a home at auction, in particular, must pay close attention to the condition of the subject property.
Auction homes sometimes stay uninhabited for extended periods of time, rendering them vulnerable to neglect, mildew, and vandalism. As a result, at the absolute least, ensure that the home’s condition fits your own standards. This might include checking to see if all of the copper lines are still in place or performing mold cleanup.
The Advantages Of Buying A House At Auction
There are numerous possible benefits to purchasing a home at auction:
- Possibility of a Discount
- Possession of Desirable Properties
- Short settlement times
- Some properties have a lot of potentials.
While some homes will be priced more than they are worth, and others will be too damaged to be viable candidates for restoration and reconstruction, there will be places where the starting offer is a fraction of what the property is worth. There will also be undervalued houses that are priced about right but have the potential to be worth much more if properly refurbished.
Foreclosure and lien auctions, from the perspective of an investor, provide the chance to invest in one or more of these properties at a cheap cost. They may then sell or rent those homes for a profit after putting in some effort. Most foreclosure auctions also provide interested purchasers with adequate time to tour each home, conduct research and develop a list of which ones interest them.
Another advantage is that there is no lengthy discussion or back and forth with a vendor. This is a one-time auction; the winning bid is final. There are no other alterations, discussions, or expenses. A bidder secures payment, maybe through a private money loan or funds raised, and then owns the property.
How To Find Homes For Auction
Each state has its unique set of rules, but the fundamentals will be the same. An investor must register ahead of time in order to participate and bid in one of these auctions. Wherever local auction information is located, registration information is often straightforward to obtain, and a bidding package is delivered following successful registration.
It’s all about research, research, and research once you’ve registered. What constitutes a good bargain on a property is determined by the property’s valuation at auction vs the bid price, the amount of labor and renovation required, and the auction property’s potential for resale or rental income.
This entails performing the following in the weeks leading up to the auction:
- Before the auction, go over all due diligence documentation and transaction information.
- calculating the property’s estimated market value
- Driving by a house (and inspecting it from the outside)
- Preparing your finance (most states will need prompt payment, so have a cashier’s check, cash, or money order on hand)
- Pre-auction deposit payment (usually 5 percent of the total owed)
- Check to see whether the auction is still planned (many get postponed or canceled)
- Raise your bidder card and bid when the time comes. (If you know your figures and have done your homework, you should have a clear sense of how much you’re willing to pay to obtain a property.)
Buying Auctioned Homes With An FHA Loan
The Federal Housing Administration (FHA) loans allow purchasers with less cash and credit to become homes. FHA loans can be used to purchase almost any home, albeit the property must fulfill certain valuation and safety standards. These restrictions are intended to protect purchasers from non-compliant houses and are useful when acquiring foreclosures. Typically, the procedure will include a free appraisal, which is a hybrid of an appraisal and a house inspection. (However, you should still have a home inspection done on the property.)
The greatest issue that purchasers may encounter when obtaining an FHA loan for auctioned homes is the need for extensive renovations on the property. Because auctioned houses are typically sold as is, the home may not be eligible if it does not match the FHA standards. If you are still interested in acquiring the property, you should check into an FHA 203(k) rehab loan. This allows you to buy a property that needs renovations, while the credit standards are greater than those of a regular FHA loan.
Can First-Time Home Buyers Buy At Auction?
First-time homeowners can participate in auctions, but they should be familiar with the procedure. First-time homeowners are sometimes pitted against real estate investors who have greater expertise in the process. The best way to prepare for this is to research auctions, visit a few before you decide to buy, and get advice from someone who has acquired a property at an auction.
According to Really Moving, buying a property at auction may save you up to 30% off the market price, making it an appealing choice for first-time buyers looking to stretch their budgets. In addition to saving money, looking for auctioned properties gives prospective homebuyers more alternatives in the neighborhood. Set your budget, explore auctioneers’ websites, and begin browsing for possible properties if you want to start looking now.
Can You Buy A House At Auction With A Mortgage?
Some properties can be purchased at auction with a mortgage, but not all. Mortgage lenders, like FHA loan lenders, have certain regulations in place regarding property conditions. As a result, if you locate an auctioned house that does not satisfy their criteria, you will be unable to obtain a mortgage on the property. Fortunately, as long as the property is livable, you should not have any financing issues.
As you may be aware, the successful bidder is normally required to present 10% of the purchase price on auction day. If you want to buy a property with a mortgage, you must obtain the loan information before attending the auction. Furthermore, mortgage lenders will only authorize the loan for the amount of the property’s worth (not the final sale price at the auction). Remember this when you bid, and you’ll have no trouble buying a property at auction with a mortgage.
Summary
How does a real estate auction work? More significantly, how can today’s investors use auctions to advance their careers? This book should have supplied you with answers to many of your burning questions about house auctions. Learning how to buy a property at auction may sound frightening and overwhelming. Still, it all comes down to knowing the process—reading this article is a good start—and performing as much due research on the property as possible before placing your offer.
While there is some danger in acquiring an REO home at auction, there is also a lot of potential. If you know your figures, as well as your exit strategy and what your local market will support, you may transform this potentially dangerous investment technique into a potentially profitable one for years to come.