If you are looking for a discounted income property, real estate auctions are a great place to find a good deal. However, if you are a new real estate investor, you might be wondering how to go about buying a house at auction. That’s why we’ve put this comprehensive guide to show you the different types of auctions, when buying a foreclosed property is a good idea, and how to do that in a successful manner.
What Are the Different Types of Real Estate Auctions?
There are different kinds of real estate auctions which are determined by why the home is being sold, who is conducting the auction, and how the auction is being carried out.
- Foreclosure auction – This is an auction that is conducted by the local authority to sell off a home after it has been foreclosed. Foreclosure auctions can be held at the county courthouse or online.
Related: Buying a Foreclosed Home at House Auctions: What Real Estate Investors Should Know
- Real estate owned (REO) auction – This kind of real estate auction is conducted by a real estate agent or a third-party company after a home fails to sell at a foreclosure auction. It is then sold to the lender and auctioned as a real estate owned property. REO auctions are also held at the county courthouse or online.
- Tax deed auction – This auction is conducted by the county where the property is located for the collection of unpaid taxes. While the sale at this type of auction is redeemable in some states, it is final in others. It can be held at the county courthouse or online.
- Federal auction – This real estate auction is conducted by government agencies such as the IRS for homes that have been seized for criminal activity or for the nonpayment of federal income taxes. Federal auctions are held by a the government agency itself or by a third-party auction company.
- Private auction – Such auctions are conducted by a real estate agent or a third-party auction company on behalf of the homeowners. They can be held at the property itself or online.
Is Buying a House at Auction a Good Idea for Real Estate Investors?
Before purchasing a house at a real estate auction, you need to understand the benefits and downsides. Below we take a look at the pros and cons of this strategy for the purposes of investing in rental properties.
Benefits of Buying a House at Auction
- Bargains – Auctions provide a great opportunity to purchase an investment property below market value. This not only makes your rental property more affordable but also increases the probability for positive cash flow and high return on investment.
- Fast closing – The process of buying a house at auction is much faster than buying an investment property in the traditional way. Once the hammer falls, closing can be completed within 30-45 days.
- Immediate income – With the quick sale process, you can start generating rental income quickly and getting a return on investment.
Risks of Buying a House at Auction
- Lots of junk properties – Since most auctions sell distressed homes, you could end up with a piece of junk if you don’t do your due diligence.
- Overbidding – If you are in a US housing market with high competition, you might be pressured to overbid.
- Delays – If your county or state has a redemption period, you might have to wait till the period is over before you begin making any repairs or renovations.
How Does Buying a House at Auction Work?
Now that you know the advantages and disadvantages of this strategy for buying rental properties, let’s take a look at how to buy a house at auction step-by-step.
1. Find a Real Estate Auction
You can find real estate auctions on websites such as Auction.com, Hubzu.com, Xome.com, and Hudson and Marshall. A visit to your local courthouse is another great way of getting information about upcoming auctions. You could also work with a real estate agent who specializes in auctions and distressed houses for sale. Bankruptcy or estate attorneys can also provide leads about real estate assets going into auction.
Meanwhile, if you are a savvy real estate investor looking for a one-stop shop for all kinds of off market properties, try the Mashvisor Property Marketplace. There you will find all kinds of properties including auctioned homes, foreclosed homes, and REO homes. Filters like location, rental strategy, budget, and property type will help you narrow down your search options. Homeowner data such as emails and phone numbers of current property owners is readily available in this marketplace.
Use the Mashvisor Property Marketplace to find off market properties
Related: How to Find Out Who Owns a House in 6 Steps
To get access to our real estate investment tools, click here to sign up for Mashvisor today and enjoy 15% off.
2. Do Your Research
Once you’ve found a property you are interested in, conduct an investment property analysis to find out its profitability potential. Mashvisor’s Investment Property Calculator can come in very handy for this purpose. Also known as the rental property calculator, this real estate investment tool will show you what to expect in terms of rental income, rental expenses, occupancy rate, cash flow, cap rate, and cash on cash return. It will also help you determine which rental strategy (traditional or Airbnb) is optimal for the particular property of your choice, as well as provide you with real estate comps in addition to rental comps for both Airbnb and traditional rentals.
Your research when buying a house at auction should also involve checking the condition of the home. It’s important to confirm that fixing and repairing the property will not bite into your return potential. If home inspection is not allowed, at least drive by the property and peek through the window. Don’t forget to check if there are any liens against the home. Consider hiring a real estate attorney or a title company to run title searches on homes you would want to bid on.
3. Get Your Finances in Order
As a real estate investor, you should always have your finances in order before moving forward with purchasing a rental property. Buying a house at auction involves the following costs:
- A deposit of 10% of the selling price on the day of the auction
- The balance of 90% about 28 days later (failure to pay this means losing the deposit and the property)
- An administration fee paid to the auction house
- Survey costs and conveyancing fees
- Any stamp duty owed on the home
- Building insurance for the home
If buying a house at auction with a mortgage is not possible, you could explore other investment property financing options like bridging loans and specialist auction finance. Just be sure to get your financing sorted out before bidding on a house. The last thing you want is to lose on a good deal because you weren’t prepared.
4. Attend the Auction and Bid
For in-person auctions, be sure to arrive at the venue at least an hour before the auction commences. Bring all the required paperwork such as proof of residency and photos. During the bidding, be sure to stick to your pre-determined budget and avoid the temptation to bid more than you can afford. You don’t want your investment property to end up in a foreclosure once again.
Related: 8 Mistakes Rookies Make at a Property Auction
For online auctions, you must first register with the auction site. Part of this registration process requires paying a small earnest deposit as proof of sufficient money. On auction day, simply log into your account, navigate to the property for which you’ve registered, and make your bid.
Related: How Do Real Estate Auctions Work Exactly?
5. Make Payment
If you are not the highest bidder, your deposit will be refunded. However, if you win a property auction, you will be required to wire your deposit within 24 hours. Do you need cash to pay the deposit? Not necessarily. Most auctions also accept cashier’s checks or bank money orders. Your closing representatives will help you finalize the transactions through the standard title and escrow process.
Conclusion
The real estate auction process can appear very intimidating, especially for a first time buyer. However, if you do your due diligence and bid wisely, you can walk away with a great deal. The Mashvisor real estate investment software will come in handy in finding and analyzing properties when buying a house at auction. Sign up with a 15% discount now.