Buying a house at an auction is one of the most effective ways to land investment properties for below market value. Auction properties tend to be undervalued and real estate investors who buy them stand to make a great return on investment. But what are the ins and outs of real estate auctions? What are the steps to buying a house at auction? And what are the investment property financing options that are available to you? This blog will answer these questions and show you how you should go about buying a house at auction with a mortgage.
An Overview of Real Estate Auctions
A real estate auction is a public property sale that features different types of property. The sale can be initiated by a government entity or a real estate auction company. These entities hold auctions for various reasons. From a lender’s vantage point, removing the investment property from the books saves them the hassle of managing a foreclosed home. For a government agency, an auction allows them to recover taxes and maintenance expenses.
For savvy real estate investors who are familiar with the process, buying an auction home can be a great way to secure an undervalued income property. With that being said, real estate auctions are highly competitive and novice bidders need to know certain concepts before entering an auction. Here are some of the key real estate auction facts that every real estate investor needs to know.
Related: How to Win a Property Auction: 7 Tips
1- There are different types of real estate auctions
The first thing that potential bidders should be aware of is that there are various types of real estate auctions. Each one varies in terms of the bidding structure. For example, an auction house that is sold through an absolute auction will go to the highest bidder regardless of the final price. On the other hand, minimum bid auctions allow the seller to set a baseline minimum for the sale price. This means that the real estate property won’t be sold if the price does not reach the minimum sale price set by the seller. There is also another type called reserve auction. Under these rules, the seller’s decision to either sell or keep the property supersedes the outcome of the auction.
2- Real estate auction sites are a convenient way to find auction properties
Thanks to the advent of various real estate auction sites, finding auction properties near you is no longer a tedious process. As a matter of fact, you can find auctioned homes in any housing market in just a few minutes. These sites often feature all the information that pertains to the auction as well as the bidding requirements. Another effective way to find auctioned homes is the Mashvisor Property Marketplace. You can easily search for and analyze auctioned properties with Mashvisor.
3- Financing a property auction deal is different than a traditional investment
One of the most important things that a first-time buyer has to know is that financing an auction home purchase is less straightforward than acquiring a traditional investment property. While most conventional financing methods are still obtainable, the approval process can be lengthy. Moreover, a mortgage lender is likely to be more conservative when assessing the risk of an auction property. Needless to say, real estate investors who plan on using a mortgage need to have a good understanding of what the process requires.
Buying a house at auction with a mortgage is precisely the focus of our next section. Let’s delve into how you can achieve that in a few simple steps.
Buying a House at Auction with a Mortgage in 3 Easy Steps
There is a widespread belief that real estate auctions are strictly cash only. While the structure of auctions does favor cash buyers, getting financing through other methods is entirely doable. So can you get a mortgage to buy at a real estate auction? The answer is yes, you definitely can. Having said that, getting mortgage approval requires adherence to certain best practices. Here is a guide on how to buy a house at auction with a mortgage.
1- Do your due diligence
Before thinking of ways to finance the purchase, the first step that you should take is making sure that every aspect of the sale is in order. Auction properties are generally sold “as-is”. Therefore, the onus is on the buyer to investigate the investment property and assess its intrinsic value. Retaining the services of an inspector or an appraiser is a move worth considering.
Related: Due Diligence in Real Estate: 9 Crucial Steps
2- Get a mortgage preapproval
Buying a house at auction with a mortgage should only come after preapproval by a lender. Getting preapproval eliminates the possibility of application rejection at the last moment. As a matter of fact, mortgage lenders won’t approve a mortgage if the investment property you’re trying to acquire is not in a livable condition. If you participate in an auction without getting preapproval or making sure that the property is mortgageable, you might end up losing your deposit. Furthermore, the tight deadlines of real estate auctions don’t allow enough time for an in-auction loan application.
Related: Rental Property Mortgage: The Ultimate Guide to Getting Approved
3- Factor in real estate auction fees
The mortgage deposit is not the only thing that you have to factor in when applying for a loan. You should also consider auction fees. These fees vary from one auction house to the other. Generally speaking, you can expect the fees to be anywhere from 5% to 10% of the final sale price. To avoid paying this expense out of pocket, you need to secure a loan preapproval for 10% more than the property’s value.
The Bottom Line
The requirements for an auction mortgage are the same as any other type of property acquisition. The sole difference lies in the fact that buyers should get preapproved first before partaking in an auction. If you are still unsure of which path to take, you can always hire a financial adviser that can provide the necessary professional guidance.
