For investors looking for investment properties to buy, real estate auctions are a popular option. Real estate auctions involve selling real estate (often undervalued) like foreclosed homes, short-sales, and REOs to the public through competitive bidding. But how do real estate auctions work? Read on to learn the basics of real estate auctions.
A Quick Overview of Real Estate Auctions
When a homeowner fails to make mortgage payments for several months, the lender can place the house in a foreclosure auction to offset what is still owed on the mortgage. These auctions are usually held by auction firms hired by the bank. The auction company will earn a percentage of the final purchase price. If a homeowner doesn’t pay property taxes for several years, local tax authorities can also take control of the home and place it in a tax lien auction held by government agencies.
House auctions can be done online or in person. They usually begin with a minimum price, after which the house auctioneer will allow competitive bidders to bid on the house until one bidder remains. The auction will be closed and the house awarded to the winning bidder.
Why Consider Buying an Investment Property at Auction?
Buying a house at auction has a number of benefits for real estate investors. First, the winning bid is usually below the market value. Therefore, buying an investment property at auction can save you a substantial amount on the list price. This makes it an attractive option for a first-time buyer looking for an inexpensive investment property with a good return on investment. Also, since negotiations are minimal, the purchase time is typically shorter.
House Auction Risks
Buyers can win big on foreclosure auctions. However, there are risks that come with buying investment property at home auctions that you should be aware of. First, house auctioneers often don’t allow buyers to inspect a house before bidding on it. The house is usually for sale “as-is”. Therefore, there is the risk of getting stuck with a property that is in poor condition. Homeowners who failed to make mortgage payments and/or pay their property taxes would probably have also neglected basic maintenance costs. When you buy the house, you will be responsible for the repairs.
Another risk is that the house may have liens or claims against it from creditors which you will be responsible for once you buy the house. You may also be hit with hidden real estate auction fees.
Should First-Time Buyers Buy Investment Property at Real Estate Auctions?
The simple answer is “Yes”. First-time buyers can purchase investment property at home auctions so long as they familiarize themselves with the real estate auction process. When bidding on a house at auction as a first-time buyer, most of the time you will be going up against experienced real estate investors who have done it several times before.
Before buying an auction home, you should first prepare yourself by learning about real estate auctions, asking for advice from those who have more experience, and attending a few auctions. Understanding the basic bidding procedures will increase your chances of coming out as the top bidder for a home auction.
How to Buy a House at Auction
1. Outline Your Investment Parameters
The first step to buying an income property at auction is to set your investment parameters. Depending on your real estate investment goals, you should know exactly what you are looking for in an auction investment property. Each parameter will help narrow down your real estate investment search to more specific opportunities. This includes the location, size, price, and condition of the property. For instance, house flippers will look for distressed properties that they can renovate and sell quickly for a profit. On the other hand, a long-term investor will focus on finding a house with fewer repairs since they plan to keep the house and rent it out as soon as possible.
2. Know Your Financing Options
When it comes to real estate auctions, cash payment is the most preferred. This is because listings at house auctions usually move swiftly and cash isn’t subject to lender requirements. While all-cash offers are preferred in house auctions, you might still be able to finance auction real estate through investment property loans if you have a pre-approval letter from the lender. Just make sure you do your research before choosing your financing method. It’s also important to note that there will be additional real estate auction fees that you need to budget for.
3. Search for Potential Auction Properties
To find the best real estate deal, you will need to look at several auction properties. Therefore, you need to know where to find house auctions. There are different ways a real estate investor can find real estate auction listings, each with its own pros and cons to consider. Some of the ways to find auction properties include browsing real estate auction sites like RealtyTrac and Auction.com, looking through direct MLS, at county courthouses, and through a local real estate agent. You can also find auction properties in the Mashvisor Property Marketplace. The benefit of searching for auction properties in the Marketplace is that you get to analyze the investment property to see how it will perform as a rental property.
To start looking for and analyzing auction properties with Mashvisor, click here.
4. Register for the House Auction
Prior to the date of the house auction, buyers are usually required to register to bid and to submit a refundable deposit to the auction company in order to participate in the auction. This ensures that all bidders are serious and motivated.
5. Pre-Auction Research
Start by narrowing your search to home auctions that allow pre-auction home inspections. Some auction firms allow prospective bidders to inspect the house for any issues or damages prior to the auction. If this is the case, consider hiring a professional to do a home inspection. This will help you know the property’s real value and estimate the cost of any repairs. This way, you will be able to determine how much you can afford to bid or if the home is even worth buying. You should also hire a title company to check for liens against the properties you have interest in.
As mentioned, some auction firms and government foreclosure auctions sell properties “as-is” and no advance inspections are allowed. To expand your search, you may sometimes need to consider such homes. However, if possible, drive by the property to get an idea of its state. The exterior of a house can tell a lot about its interior.
6. Participate in the Auction
So, how does the actual auction work? On auction day, the auction house verifies each bidder’s registration information and funds for the initial deposit. Before a live auction commences, the auctioneer gives some brief information about the property and the terms of the house auction. Each auction, whether live or online, has its own rules and regulations. After that, the house auctioneer starts with an opening bid. Registered participants then place their bids until a final bid price is reached. The house is then awarded to the final bidder.
If you win the bid, you will typically be required to make a cash payment or complete the financing for the house within a set time period and also pay a sale commission to the auction house to cover administrative expenses. The seller will sign the property deed and the property will be transferred to you.
The Bottom Line
I hope this blog has given you the answer to the question “How do real estate auctions work?” As you can see, there is much more to how an auction works than just showing up and placing bids. Real estate auctions can be a quick and lucrative way for buyers to get a good real estate deal since winning bids are usually below market value. Generally, they provide a good investment opportunity for real estate investors. However, doing enough research is essential to avoid ending up with a money pit. Also, consider hiring a financial adviser to provide you with professional advice.