Like most Irving rental property investors, when you look for a great bargain, you might be thinking about buying real estate at an auction. However, there are many things you need to understand before your first auction. Buying income properties at auction is far riskier than obtaining them in other ways. Even though having useful information and a strategy can help reduce some of that risk, real estate auctions will never be right for the faint-hearted – or risk-averse – investor. Those comfortable with some risk keep reading to understand the basics of successfully buying a rental home at auction.
Risks and Benefits
Probably the initial thing to note before buying an income property at auction is that the procedures involve both risks and advantages. While houses sold at auction may look to be priced below market value, many of them are in poor condition or have severe problems that need comprehensive repairs. You may not be able to inspect the property before you buy, so this is one risk that may be difficult to avoid. Additional risks of buying at auction include the potential to overbid in the heat of the moment and potential delays after purchase as the property works its way through different entities, state or country redemption periods, etc.
However, auctions are one way to locate real bargains on rental real estate. When you purchase a property at a massive discount, that can drastically increase not only your cash flows but the overall return on your investment as well. An additional advantage is the potential to take possession of the property within a short time. In most cases, auctions can transfer the title on a property within 30 days, allowing you to begin preparations for your first tenant instantly. That indicates your property could begin generating rental income far more quickly than a traditional sale.
How It Works
The method of buying a property at an auction starts by finding real estate auctions. You may do this by searching online auction websites or databases or by consulting with a real estate agent specializing in auctions. If a potential property has been found, your next objective is to find out as much as you can about the property. Make sure you do a detailed comparative market analysis and evaluate the property’s potential as a rental home. Desirably, walk through or arrange an inspection of the property. If that is not possible (and often it is not), you could drive by and peek in the windows. In your research, you should conduct your investigation. Confirm if there are any occupants, liens, or other legal threats that could build roadblocks to ownership.
To bid competitively at an auction, it’s advisable to have a lot of cash on hand as well as financing lined up before you start to bid. In numerous cases, to buy a property at auction, you will need at least 10% of the selling price for a deposit, the ability to pay the remaining balance immediately (or within a matter of days, in most cases), and cash for administrative fees, survey costs, and insurance. What is more, there are different types of auctions, so you must carefully research all of the auction rules and be prepared to obey them.
What to Expect
Before you can bid in a real estate auction, you will need to register and submit a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, you need to come approximately an hour before the auction starts to check in and get your official bidding card, which you will use when you bid. If the auction is online, you’ll log in to the auction website to make your bid. The minute the bidding has started, you will need to know exactly how much you can offer before the property is no longer a bargain. When you are able to prevent a bidding war, the chance of paying too much will vastly lessen.
You will know within minutes whether you’ve won your auction or not. If you don’t win, you will get a refund of your deposit. However, if you win, you may need to pay for the property in full immediately after the sale. Some auctions require you to bring cash or money order with you to complete your payment right away. Others will give you until the next day, or possibly several days, to send the required funds. Failure to do so will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so it’s necessary to complete payment as requested. Then, even though you won the property at auction, you will still go through escrow and closing, just as you would when buying any other property.
Growing your investment portfolio – through auctions or any other means – can be a demanding but satisfying endeavor. Real Property Management 360 offers free market rent evaluations, and we’re willing to give you advice on any potential properties you’re considering purchasing. You can contact us online or call at 817-502-3588.
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