Concerning real estate investors, there are both pros and cons to buying a rental property at auction. Although barters can propose new ways to acquire investment properties and probably grow your likelihood of discovering an imposing agreement, buying at auction can as well be far riskier than purchasing properties through different means.
Having limited information concerning the properties for disposal, the chances of making a very expensive mistake are high. There are numerous methods to mitigate that risk, but even so, you should discover as much as you can concerning residential property auctions before determining whether purchasing your new investment property this way is good for you.
There are numerous factors 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 another normal situation, the homeowner loses the house due to the nonpayment of the mortgage loan or owners association assessments.
When a homeowner defaults on his or her mortgage and the lender is incapable of reaching an acceptable arrangement with them, the property is generally 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 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. In particular situations, 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 explore the location yourself. It is very normal for the past landlord 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 became vacant for a long 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 talk to neighbors, real estate agents, and search local records for information, which may benefit you. Outside 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 ready 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 likewise something that you have to comprehend before approaching to purchase a property this way. In many instances, 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.
Nevertheless, once the bidding begins you’ll need to comprehend how real estate auctions commonly function. In some situations, the lender is not required to accept your offer even if you are the highest bidder. Most of the time, the starting price is the amount owed to the bank or lender; in other matters, the starting price may be remarkably inferior to increase the auction’s chances of success. The auctioneer can also put a hidden reserve price on the property, which signifies 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: frequently, 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. Although some auctions do allow financed purchases, at the minimum, you will need to be prequalified before you can bid. There are also auction fees that must be disbursed.
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, regardless of the requirement for immediate payment. Because of that, shopping an investment property at auction is often something only those who can spare to pay cash can handle to execute.
If you have the means and an inclination for risk-taking, buying investment properties at auction can be a capable system to grow your portfolio of rental properties, and maybe even find a steal in the process. But there is a lot to learn before buying at an auction, making it essential to include business experts that you can rely upon to help you determine whether buying at an auction is the right choice for you.
At Real Property Management Lehigh Valley, we could assist property investors pondering on buying their next rental home at auction. We have the gear and assets that you can employ to make the optimum selection for your investing style and goals. For more information, contact us online or call us at 484-544-3351.
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