Have you felt discouraged by the “cash only” requirement of most auctions? We understand that, if you’re a new real estate investor, you might not have the liquid cash to buy auction properties. However, not having the cash does not mean “game over” for your real estate business. Here, we will teach you a few ways of how you can buy a house at auction even if you don’t have the cash saved up.
What Are “Cash Only” Auctions?
Well, it is true that many sellers at auctions only accept cash offers and hence, cash buyers have the upper hand. So what does “cash only” really mean? It simply means that you need to pay for the investment property immediately or within a specified time frame after placing the winning bid. As usual, these auctions allow bidding on a house until the end of the bidding period, after which the property is sold to the highest bidder. Usually, the winning bidder will either need to pay the full price immediately or pay a small deposit (5% to 10%) and the remaining balance can be paid within a month or so. Note that buyers also need to cover the real estate auction fees.
The “cash only” requirement is common in fast-moving markets. It is almost always required when the properties need a lot of renovation (due to difficulties of obtaining a mortgage on distressed properties). Another reason is that obtaining financing from a bank is very difficult when buying a house at auction because of the short auction closing windows from just a few hours to a couple of days.
Related: Real Estate Auctions: Everything You Need to Know
But is it possible to buy a house at auction without cash? Whether you are planning on attending a live auction at courthouse steps or online auctions, you cannot get past the “cash only” requirement per se, but there are options for real estate auction financing.
How to Buy a House at Auction Without Cash: 3 Ways
Below is a list of our real estate auction tips to obtain quick cash. These will be useful if you do not yet have the financial resources needed for buying real estate at an auction.
#1 – Borrow from Hard Money Lenders
The first option for financing an auctioned property is to borrow the cash from hard money lenders in your area. A hard money loan is a specific type of loan through which a borrower receives funds secured by a real estate property. These are typically issued by private investors or companies.
What does this process look like in practice? First, you have to collect all the required information on the investment property you are planning on buying. (If you’re searching for auction properties with websites like Mashvisor, you can get all the info you need. Start your search in the Property Marketplace now.) Second, provide all this information to the lender before the time of the auction. If they approve the application, you will get your cash in time for the auction.
Hard money lenders base their lending decision on the investment property, and not your assets or credit score. However, they are more costly as they make money by charging higher interest rates than banks. On the other hand, you will get your cash faster. If you accept that hard money loans have upfront fees (which are higher in rate and are shorter in terms) and that you need to replace the cash with conventional financing in just a few months, then this option can be for you. Amongst investment property loans, hard money is the best suited for fix and flips.
Related: A Real Estate Investor’s Guide to Hard Money Loans
#2 – Seek Private Money from Peer-to-Peer Lending Sites
Peer-to-peer lending, also known as social lending, crowdlending or private money, enables individuals to obtain loans directly from other individuals through a simple online platform. Hence, financial institutions are no longer needed as the middleman. Peer-to-peer lending platforms such as UpStart or Funding Circle have become very popular alternative financing methods.
However, this financing method might not be best suited for you if you are a beginner investor. Many of the peer-to-peer sites require that your credit history and assets meet certain criteria. Also, new real estate investors‘ track records in investing might not convince these lenders to lend them the money. But, if you are a more experienced investor, peer-to-peer lending can be a good way to collect the cash required for participating in “cash only” auctions.
Related: Financing a Rental Property: How to Buy a House with No Money Down
#3 – Using a Personal Loan to Purchase Real Estate
The third but more costly and risky option is to use personal loans to buy auction homes. One could use many types of personal loans here to provide the needed short-term funds. This can mostly work for those who have good credit, and it does not hurt to have a stable day-job either. The property prices should also be within the ceilings of personal loans.
Do note that these are expensive sources of cash with high interest rates. As a property investor, you want to be careful when opting for personal loans. However, it is reasonable to use an unsecured loan to purchase and fix real estate and then refinance into a conventional loan.
Final Thoughts
You might have noticed that we did not list conventional bank financing as a viable method to purchase an auctioned property. This is simply because it is often very unrealistic that the investment property meets the eligibility criteria of most mortgage lenders. As a general rule of thumb, mortgage lenders will only lend against a property that is in an immediately habitable or lettable condition. It is also unlikely that applicants would be able to process their lending application by the time the auction closes.
Conventional bank loans will come into the picture a couple of months after you have purchased an auctioned house with hard, private or personal money. These sources of funding always come with costs, and you want to quickly refinance into conventional bank loans if you plan on holding onto the investment property. This can be done, for example, after the investment property has been renovated to meet mortgage eligibility criteria.
We hope these quick cash strategies will help you seal a great real estate deal at the next auction. If you feel you still need more information and resources before taking the leap, Mashvisor covers auction properties in our real estate investment blog.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.