Buying real estate at a property auction is becoming increasingly popular in the United States in every market from the Chicago real estate market to the Los Angeles real estate market. Many real estate investors resort to this mechanism because they get to explore an array of options and purchase an investment property at a discount or at a price below market value. Moreover, buying property at real estate auctions is preferable because real estate investors face less competition as opposed to buying traditionally through property listings. Note, however, that a property auction normally caters to more experienced real estate investors. For beginner real estate investors, we recommend conducting a thorough analysis of the rental market before delving further.
While buying a house at auction can be a bargain, it is considered a highly risky business. When you are buying at a property auction, you have limited knowledge of the property; you are not allowed to view the interior of the investment property so you won’t be able to learn of any damages or other structural problems. Moreover, you will not know of prior liens which you will have to pay upon winning the bid.
In order to make a success story of buying property at a property auction, we have developed a list of the top mistakes that you should avoid at a property auction. This is your mini guide to how to buy investment property at auction.
#1: Showing Hesitation
The answer to the question “how to win a property auction” lies primarily in the way you compose and present yourself. Showing hesitation and reluctance will send a negative image about you to not only the auctioneers but also the other bidders. The other bidders will sense your nervousness and play it against you. Be assertive and confident from the moment you arrive at the auction room until the moment you sign a contract. Remember to stay calm and focused on your goals. Stick to your plan, your bidding strategy, and most importantly, your budget limit.
#2: Going Underprepared
Another mistake that investors, particularly beginner real estate investors, make at a property auction is arriving underprepared. Do not make this mistake, and instead, learn everything about the real estate auction process beforehand. Do your due diligence; figure out deposit payment and financing, get familiar with auction terms and conditions and run a thorough real estate market research prior.
Additionally, put a bidding strategy in place before you arrive at the auction house. You should know exactly how you plan on bidding, your body language and the tone of voice you intend to use, where you’ll stand in the room, and how you’ll present yourself.
#3: Letting Your Emotions Lead You
Auctions can be high-pressure and accompanied by a lot of emotion causing many real estate investors to make irrational decisions. Remember to stay calm and know your bidding strategy beforehand. Set an upper limit price prior to entering the auction room to avoid hastily bidding higher than what you can afford. Be practical and do not fixate your attention to leaving the auction room with a contract; sometimes your goals won’t align with what is being offered.
#4: Neglecting a Title Search
Often times, investors neglect to do a title search and end up paying a lot more in liabilities than what they can afford. Some auctions do not give you a clean title, and thus such a property for sale by auction then obliges you to pay for any liens and liabilities. Hire a legal attorney to do a title search, and check with the auction company to see if they can provide a clear title.
#5: Neglecting to Inspect the Exterior of the Investment Property
Buying an auction property can be risky because you are not allowed to enter the property before agreeing to an offer. Real estate investors will not be able to check the condition of the house nor order a home inspection. To better assess the condition of the house, look at the exterior of the property and the landscaping surrounding it. A well and up-kept exterior and landscaping can mean the interior of the property is also in good shape.
If at a foreclosure auction or seized property auction, make sure to inquire about how long the property has been vacant. You don’t want to buy a property that has been sitting for some time without any maintenance or upkeep.
#6: Paying Too Much
The fast pace of an auction may drive bidders to go into bidding wars and end up bidding higher than what they can afford. To avoid paying too much for a property, set an upper price beforehand. Set your minimum and maximum limits and do not go overboard.
Also before you go to an auction, check for housing market data for similar properties and set your budget accordingly. Look into real estate comps online to compare properties and their prices within the area. Mashvisor’s Investment Property Calculator will automatically find the comps for an auction listing in the Mashvisor Property Marketplace and provide you with the most accurate data.
#7: Being Pushed by Your Real Estate Agent
Often times, real estate investors tend to get pushed by their agents. Sometimes, agents and auctioneers will not care whether or not you overpay. The real estate agent will still get paid from the deposit that you forfeit after bidding on a house regardless if you can afford the property or not. Do not get pushed by your agent. If you have exceeded your limit, stop there! There is plenty of fish in the sea.
#8: Forgetting to Arrange Financing
Usually, when you are making a real estate deal in a property auction, auctions require buyers to sign an unconditional contract that may require a deposit to be paid immediately. In a foreclosed property auction, the successful purchasers will have to pay a deposit on auction day ranging from 5% to 10% of the final bid amount. Many real estate investors neglect to arrange for financing and end up unable to commit to the property. We recommend that you plan your financing ahead of time and get a mortgage approval if necessary.
Buying a house at a property auction can be thrilling and is accompanied by higher margins for profit. However, it can be considerably risky; make sure to take into account the above-mentioned points for a successful transaction. For more information about property auctions and how they work, visit Mashvisor‘s knowledge center.
Ready to buy property at an auction? Visit the Mashvisor Property Marketplace to view and analyze auction listings.