Buying a house at auction with mortgage financing could help you start investing without the need to up a lot of capital.
Unfortunately, sellers and auctioneers do not always accept bidders paying with mortgage for auction properties. But if you want to start investing in real estate, then how can you afford even an auction house that could sell low?
In this article, you will learn:
- Why banks and government authorities sell houses at auctions
- How auction houses work
- Ways you can get auction financing
- How to determine the amount you can bid
Why Banks and Government Authorities Sell Houses at Auctions
When buying a home, you typically start your search online. Once you find a property that you like, you would contact the owner or agent who is selling it. Then, you visit the house and decide if you want to purchase it. And if you do, you prepare an offer to kick off the transaction.
But during your search, you may also find foreclosed properties. Homeowners who fail to pay their mortgage or their property taxes end up foreclosing on their properties. The ones selling these properties are the lenders or tax authorities to whom they owe money.
Instead of putting them up for sale the usual way, these lenders and tax authorities put foreclosed properties up for auction. This is so they can get the highest possible price and mitigate any losses they incurred from the foreclosure.
If you find any foreclosed property listings, you will not find the agent’s contact information. Instead, you will see details of where you can buy the foreclosed home, which is usually at an auction. You are also not allowed to visit the property or can only do a drive-by inspection. You might also wonder if buying a house at auction with mortgage financing is possible. That would depend on the type of financing that you avail.
How Auction Houses Work
Foreclosure auctions are usually held by bank-hired trustees or government officials through auction houses. They have their own set of rules. Additionally, they must also conform to the rules set by the state or municipality where they are located. And most of the time, they only accept cash and may refuse real estate auction financing.
The types of auctions they hold depend on each auction house and the property owner’s preference.
Types of Auctions
There are three common types of auctions deployed for selling properties. It is up to the seller to decide on which type the trustee will use for their property.
#1: Absolute Auction
In absolute auctions, there is no reserve price or a minimum required bid for the house to be sold, and the sale is awarded to the highest bidder. Because the bidding starts at $0, this type attracts a lot of real estate investors. Even if only one person shows up (which is highly unlikely) and bids $1 on a house, their bid would still be accepted.
#2: Minimum Bid Auction
Also called minimum published bid, the minimum bid auction requires the seller and the auction house to pre-determine the lowest acceptable price for the property. This minimum price should be stated in the auction brochure and any advertisements or listings. It is also announced during the auction. The seller usually sets the minimum bid to the balance that is owed on the mortgage or taxes.
#3: Reserve Auction
In reserve auctions, the seller has the right to accept or reject the highest bid within a specified time. This can happen immediately following the auction or can last until 72 hours after it ends. The seller sets a minimum price, but they are not required to post it publicly. They are also not obligated to approve a bid if the price is not acceptable to them.
Types of Bids
In every auction, no matter the type, there are two possible bidding arrangements that the seller can choose to try and increase the sale price.
#1: Open Bidding
In an open bidding arrangement, interested buyers come together in a physical venue or go online to bid on a property. Everyone present is aware of the competing bid amounts and can continue to raise their bid until one is either declared the winner of the auction or the others decide to drop out.
Bidders like this arrangement because they can see what their competition is doing and can raise their bids as gradually as possible. And if there is no competition, they can submit a lowball offer and still have a chance to win. Open bidding can also result in a bidding war, which can generate a surplus for the seller.
#2: Blind Bidding
Here, interested parties submit bids with certified earnest money funds. They do not know how much the others are willing to pay.
The seller then selects the winning bid. Their selection does not have to be entirely based on whoever bids the highest amount; they may also consider other factors. Lenders prefer this arrangement even if it does not attract a lot of bidders.
If you are an experienced investor, you should have a good sense of how much to bid. But if this is your first time, you might risk overbidding because of your lacking experience.
In-Person vs Online Auctions
Aside from the different auction and bidding formats, auction houses can also hold their events in person and online.
In-person auctions may take place outside the local government courthouse or in a hotel conference room. They also finish quickly. Upon arrival, you take a numbered card, which you will lift when placing your bid. Experienced bidders usually wear sunglasses and hats so others will not notice any emotional response on their faces.
If this is your first time attending an in-person auction, it is best if you do not bid on anything yet. Instead, go to these auctions to get used to what is happening.
Online real estate auctions are becoming more frequent, and unlike in-person events, they may last for days or weeks.
If you are a first-time bidder, you will find online auctions more accessible since you will have an easier time finding all of the information you need on the website. You are also free to observe any ongoing auctions. If you are using a certain website for the first time, make sure to study the rules first as each auction site may have its own rules and procedures.
You will also have to register and qualify before you can start bidding, so it is best to get these out of the way well before the property you want to get comes up for bid.
Is Buying a House at Auction With Mortgage Financing Possible?
Can you finance an auction home? Most auctions only accept cash payments. But you could find other types of financing to help you get the money you need by auction day.
Hard Money Loans
When beginner investors ask, “Can you get a loan for an auction house?” They learn about hard money loans. These are considered “last resort” loans or short-term bridge loans, and the lenders are usually individuals or companies instead of banks
The terms of a hard money loan are based on the value of the property you wish to purchase, which will become your loan collateral. When taking out this loan, you must have the intention to pay it off quickly, usually within one to three years.
Even though the cost of a hard money loan is higher than a conventional mortgage, you will go through a less stringent application process. You will also get access to the money before the auction day. You might even have a flexible repayment schedule.
Delayed financing is a method in which you get a mortgage after you have purchased a property using cash. But because this requires you to have the cash to pay for the auctioned house in the first place, you will still need to find a source for your initial funds.
Experienced investors who already have liquid assets use this method often so they can acquire more properties in a short time. But if you are a beginner investor and do not have enough funds to pay for the entire property, you could borrow from family and friends. Then just repay those loans with the cash you got from the delayed financing.
Also, you will have to meet the appraisal and home inspection requirements to get approved. So try to get renovations done before applying for delayed financing.
Home Equity Loan
If you already own a home, you may be able to use that property’s equity to secure a loan or line of credit. Then you can use the proceeds to pay for your foreclosure house.
Home equity loans can provide the same amount of funds as a conventional mortgage while offering more attractive terms than hard money lenders. You can also hold a home equity loan for much longer terms than hard money loans, so you will not have to pay it back quickly.
The one big risk with this type of financing is that the property you used to secure the loan serves as collateral. So if you are not able to make the required payments, your own home could end up getting foreclosed.
How to Determine the Amount You Should Bid
When deciding on the amount you should bid, your concern here would be the maximum price that you are willing to pay. To do this, you need to find comparable properties in the neighborhood where you want to buy a home and find their market value. You can use an online real estate tool like Mashvisor to do your search. Our platform has features that let you find available properties, even foreclosed ones, in the US and analyze their market value.
For example, you are looking for a house that has 3 bedrooms and 2 bathrooms. Using Mashvisor, you find that the average sale price of a move-in-ready home in the area with these features is $330,000. And in this scenario, you are allotting $50,000 for renovations.
If you were to pay in cash, you would already be breakeven if you bid $280,000 on a 3-bedroom property and resell it at market value after making repairs. But if you renovate it for $50,000 then put it up for rent, you can get even more returns.
Using an investment mortgage calculator
But what if you plan on buying a house at auction with mortgage financing? This will require a more complicated computation, so it would be better if you use something like Mashvisor’s Investment Mortgage Calculator. We created this tool to help investors get a more accurate estimate of how much they can expect to spend when buying a property. You can use this calculator not just to determine the amount of money you will spend one time and each month but also to help you decide whether the property is worth the investment.
You will find the calculator when you click on a listing. Just scroll down to the Rental Strategy section, select “Mortgage” under the Mortgage Calculator, and input the needed information. You can calculate based on the listed price, or you can type in a custom price, which can be your maximum bid price. Under Expenses, you can also change the amounts that you think you will pay for and add custom expenses.
Based on these data, the Mortgage Calculator will show you your monthly expenses, cash flow, cash on cash return, and cap rate based on your rental strategy. You can also find a table of when you can expect your investment payback.
Start Building Your Real Estate Empire With Auctioned Houses
When a homeowner defaults on their mortgage loan or fails to pay their property taxes, they could end up getting their homes foreclosed. These properties are then auctioned off by the lenders or tax authorities to make up the amount that was owed to them.
Auctions have different formats and bidding arrangements. They may also happen in person and online. Whichever type of auction you decide to attend, make sure that you familiarize yourself with the process and handle any needed registration and qualification. This is so you will not miss out on the property you want to buy.
While most auction houses only accept cash to pay for the foreclosed property, buying a house at auction with mortgage financing is still possible. Just make sure that the property you purchase is worth the investment so you do not end up defaulting on your loan. Use Mashvisor’s Investment Mortgage Calculator to help you find a rental home with the biggest earning potential in the neighborhood.
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