Looking to buy an investment property and start real estate investing? Then you have to be open to finding properties for sale through sources you might not have thought of before. You don’t have to limit yourself to the traditional sources like searching the MLS or working with real estate agents. You can also purchase a property at real estate auctions.
Many beginner investors are intimidated by the auction process or simply don’t know how to buy a home at an auction. However, once you learn how it works, you’ll soon realize that this non-traditional way of buying an investment property is actually an exciting alternative – and one that can be perfect for those looking to invest in real estate. Keep reading to get a handle on how a real estate auction works, the types of auctions in real estate, how to buy auction homes, and more.
The Basics of the Real Estate Auction Process
A house auction offers a range of properties for sale at different price points. There are auctions for foreclosures, HUD homes, non-distressed real estate owned properties, and tax liens. Types of real estate properties that you can find at an auction include single-family homes, multi-family homes, commercial properties, as well as real estate notes. Furthermore, auctions can happen in real time or over a few weeks and can either be conducted in person or online (more on the different types of auctions below).
Starting with a minimum price, an auctioneer allows competitive bidders to bid up the price of a property. Generally, bidders must register in advance and submit proof of identity. Also, some real estate auction companies require an upfront deposit to ensure that bidders are serious. Additional financial information (like bank statements or proof of available lines of credit) may also be requested as further assurance that the highest bidder can complete the purchase.
After reviewing the available properties as a bidder, make sure to read all the terms associated with the auction for the specific property you plan to buy for real estate investment. Then, once the auction begins, the auctioneer will set time for submission of bids. At the end of the bidding period, the auction will close and the property is sold to the highest bidder. Depending on the auction, the winner will either need to pay immediately or pay a 5% – 10% deposit and the remaining balance within 30-45 days.
Different Types of Real Estate Auctions
When looking at real estate auction listings, keep in mind that there are 3 different types of auctions. Each type has its own bidding requirements and attracts certain types of investors.
1) Absolute Auction
This is a standard house auction where the property will be sold to the highest bidder regardless of the final price. In an absolute auction, there’s no minimum bid amount – meaning the property can sell for any price. For example, if the bid started at a hundred dollars and you were the only buyer to show up, you could win the auction at a hundred dollars. However, it’s more likely to have competition as investors understand they could end up buying a house at auction well below its actual value. Sellers are usually financially distressed and in need of quick cash. So, this type of real estate auction typically attracts all-cash buyers and short-term property investors.
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2) Minimum Bid Auction
This is a house auction where the seller can set a minimum reserve price on the property. The seller will only accept the published minimum price or above. Meaning, if the highest bid doesn’t meet the reserve requirement, the property remains unsold. Sellers in these auctions are not distressed. For example, banks conduct minimum bid auctions if they’re not in a hurry to sell foreclosures and want to recoup a specific percentage of the loan. As a result, this type of auction attracts long-term real estate investors.
3) Reserve Auction
In a reserve auction, the highest bid becomes an offer instead of the sale price. Once the auction has ended, the seller reserves the right to either accept or reject the winning offer in 72 hours. As you can expect, the seller isn’t distressed so this type of auction doesn’t attract investors looking for a quick sale. As for long-term investors, on the other hand, the possibility of finding good real estate investments in a reserve auction is pretty good. However, these types of real estate auctions tend to scare away potential buyers who don’t want to risk wasting time.
Live vs Online Real Estate Auction
As mentioned earlier, auctions can either take place in person (live real estate auction) or online.
Live auctions are typically held in the county courthouse – they can also be held at any public location, like a hotel ballroom – and you’re required to show up in person to make your bid. Quite often, live real estate auctions also take place right on the property. They’re open to anyone interested in attending, but you must register if you want to make a bid on a property. You’ll also need to demonstrate that you have the financial means to buy a real estate property before you can bid.
Online auctions are increasing in popularity as more and more investors choose them simply because they make everything easier. Real estate investors can bid from anywhere over a set time period, which could take days or weeks to finish. Like live auctions, you have to register before bidding online. The majority of real estate auction sites will also require you to show that you’re a serious buyer by requiring a refundable deposit.
Pros and Cons of Buying Property at Auction
So, now you know the real estate auction process and the different types of auctions in real estate. But what are the benefits and risks of buying auctioned homes for real estate investors? Just like any real estate investment, there are pros and cons to buying property at auction that you need to consider.
Pro #1 Potential Price Breaks
First and foremost, auctioned homes have the potential to be sold at a discount – especially those offered at an absolute auction. This is great for real estate investors looking for bargains and cheap properties for sale. Moreover, auctions limit price competition to a defined bidding period with a stated end date. This reduces the possibility of sellers leaving properties on the market to wait for better offers or changes in the market that may increase the price.
Con #1 Fierce Competition
As you can expect, real estate auctions attract not just other investors, but builders and developers who tend to have more cash to spend on real estate. If this is your first time buying a home at auction as an investment property, beware of this competition. Beginners tend to make the mistake of paying over their budget for a property because of the fierce competition. Don’t do that!
Pro #2 Access to Desirable Properties
As mentioned, auctions offer an alternative way to find investment properties for sale. This is especially helpful for real estate investors in a tight housing market. There’s also a wider range of properties offered at auctions. You can find information on all properties from certain newspapers, the auction site, and auction boards at a property agent’s office. This allows you to review all available options to decide which one you’ll want to bid on.
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Con #2 No Time to Inspect the Property
Properties at real estate auctions are sold “as is.” As a result, a real estate investor is often not allowed an inspection when buying a foreclosed home at house auctions. Since the property is sealed, you’re unable to get inside the property to conduct a proper inspection. Hence, you’ll never know the hidden problems of the property until you won the bid, but then it’s too late to back away.
Pro #3 Fast and Transparent Process
Another benefit of auctions is that the purchase tends to be fast and straightforward. The terms have already been predefined by the seller and the auction company. This means there isn’t an extended time for negotiation after the highest bid is announced and the seller can’t persuade you to pay more. It’s a one-time auction; the winning bid is the winning bid and the entire purchase process can take just a few weeks.
Con #3 Best for Cash Buyers
A common misconception with buying real estate at auction is that you can only purchase all-cash. While this is not true (you can finance a house at auction through traditional loans), the approval might take too long. This is why the speed of real estate auctions is only a benefit to all-cash buyers who have the funds available and ready to buy the house outright. You’re chances of winning the bid are slimmer if you’re not a cash buyer.
How to Find a Real Estate Auction Near Me
1) Online Real Estate Auction Sites
There are many real estate auction websites. Some offer both in-person and online auctions, while others offer online-only real estate auctions. Property investors can check out these sites and browse around to see what types of auctions and properties they offer, the auction requirements, and start looking for auctioned houses to bid on.
2) Real Estate Professionals
Professionals in the industry often know about upcoming real estate auction listings. This makes reaching out and contacting them one of the best ways to find an auction home. These professionals include real estate agents, brokers, home appraisers, contractors, bankruptcy lawyers, bankruptcy accountants, and foreclosure sales agents – also known as trustees.
3) County Courthouse
Your local county courthouse will have a list of all upcoming real estate auctions in the area. As a real estate investor, you can obtain auction listing information either online at the courthouse website or in-person at the courthouse itself. However, keep in mind that this way of finding auctions limits your search to the local county.
4) Real Estate Classifieds
While somewhat old-fashioned, real estate auction companies still list foreclosed homes for sale in local newspapers. Some of these newspapers have online presences too. Nonetheless, it’s best for investors to use real estate classifieds with another method of finding auction listings.
How to Buy Property at Auction
Step 1: Set Your Investment Criteria
Say you’ve found a foreclosed real estate auction and you’re planning to bid on a property to purchase as an investment. The first step is to determine what exactly you’re looking for in an investment property. Setting investment criteria will help you narrow down the list of properties available at the auction. To set your criteria, consider the following:
- Property Characteristics: A property’s size, condition, location, and type are all characteristics you should define. For example, do you want to invest in a single family home or a 1-4 unit multi family home? Do you want to buy an investment property in good condition or a distressed property? Knowing this helps you limit your options and not waste time in your property search.
- Investment Strategy: You also need to determine what you plan to do with your new investment property. Do you want to rent it out to start generating rental income, or fix-and-flip it to increase its value and sell it for profits? Your investment strategy will affect what characteristics to look for in an auctioned home.
- Your Budget: Make sure you have a maximum budget that you’re willing to bid for an investment property at real estate auctions. It’s important to note that winning bidders are charged a “buyer’s premium” – an extra fee paid to the auctioneer to cover administrative expenses. Besides this fee, make sure you budget for holding, repairs, and marketing costs.
Step 2: Know Your Financing Options
As mentioned, all-cash buyers have an advantage when buying homes at auctions. So, if you’re not an all-cash buyer, it’s crucial that you secure financing before stepping into a house auction. This is the only way you can compete and have a chance to win against cash buyers. Wondering how to buy a house at auction without cash? These are the best types of loans for real estate investors to use when buying houses at auctions:
- Hard Money Loans: These loans are best for short-term investments. The loan term lasts for 12 months with 9% – 12% interest rates. To obtain hard money loans, you’ll need a minimum credit score of 550+ and a minimum down payment of 10%+ of LTV and 20%+ of ARV. Plus, the approval time for these loans is as little as 3 minutes!
- Conforming Mortgage: This is best for financing long-term investments as the loan term is up to 30 years. You’ll need a minimum credit score of 640+ and a minimum down payment of 15 – 25% of the total investment for this mortgage. Interest rates are lower than the first option (4% – 6%), but the approval time can take 30 – 45 days.
- Non-Conforming Mortgage: The loan term for this mortgage lasts from 1 month to 30 years. This makes it a good financing option for both short-term and long-term real estate investors. Interest rates range from 4% – 9.5%. To qualify, you need a minimum down payment of 20 – 25% of the total investment and 620+ minimum credit score. The approval time takes 15 – 45 days.
Step 3: Attend the Auction and Bid
Both online and live real estate auctions generally have the same bidding process. First, all bidders have to register and bring certified funds for the initial deposit (around 5% of the opening bid price). Before the auction starts, the auctioneer verifies each bidder’s funds and registration information. The auctioneer then shares some information about the property and explains the terms of the auction. From there, the auctioneer starts with an opening bid and registered participants can place their bids. The auctioneer continuously tries to drive up the price until it reaches a final bid price. Participants will have a few chances to think the price over before awarding the house to the final bidder.
What to Consider Before Buying at Auctions
1) Research the Local Market
When buying investment properties at real estate auctions, you must not forget to research and analyze the market first. You want to get an accurate idea of the value of the auctioned home to make sure you’re not overpaying for this investment. To do this, check real estate comps in the area and do a market analysis. Choose a few recently sold properties that match up in characteristics to the auctioned home you’re targeting. This gives real estate investors a realistic market value when buying a property at auction.
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2) Learn More About the Property
We’ve already mentioned that you’re not allowed to inspect real estate at auction. However, you should still put time and effort into learning as much as you can about this house before buying it for investment. Drive by to study the exterior condition of the property and its location. Also, use any information provided by the listing to learn the estimated value of the property, how much the borrower owes on the mortgage, and if there are any liens against the property.
3) Have a Title and Liens Search Conducted
A house’s title is the evidence of ownership. A clean title will show a chain of ownership without any legal problems. This is what you want to see at real estate auctions. To find out if the auctioned property you’re looking at has a clean title, you can hire an attorney or a title company to run a title search.
A house lien, on the other hand, is an unpaid debt attached to the house. Any liens on a home at auction could become your responsibility if you buy it. The last thing you want is to buy a home for $400,000 but then discover there’s $100,000 worth of liens on the property. To avoid this, have a title or escrow company identify any liens before buying an investment property at an auction.
4) You Need a Certificate of Title
When you win an auction, remember that the home is not yours until you have the certificate of title. It could take as much as 10 days to get this certificate, according to Auction.com. During this time, the owner could pay off the loan or file an objection to the sale. Meaning, you can still lose the property until you have the certificate of title. Therefore, be patient and wait for the certificate before you do any work on the property.
Buying an auctioned home can be a lucrative way to start or enhance your real estate investing career. We hope this guide has answered your questions regarding how do real estate auctions work and how to buy an auction house as an investor. If you’re looking to find and analyze auction listings, visit Mashvisor.
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