- Buying houses at auctions may not be the most traditional investing strategy, but it’s certainly a viable one worth looking into.
- The real estate auction process isn’t more difficult to navigate than a traditional sale, but it will require a different set of skills to master.
- Learning how to find homes for auction can be a great move for any investor, especially those looking for a discount.
If you’re looking to buy an investment property, you have to be open to finding them through sources you might not have thought of before. While many new real estate investors turn to traditional sources to find properties, such as the MLS or outbound marketing, there is one source that can provide a great return of investment without much marketing required: how to buy a house at auction.
Unfortunately, many new investors are scared off by the real estate auction process, and are otherwise unsure of how to make an offer on a REO (real estate owned) property in an auction setting. How does one join a real estate auction? How do they work? And what can you do to boost your chances of finding a winner?
Though there are no guarantees in the real estate investing business, and fewer still with a real estate auction, here’s a breakdown of the real estate auction process to make sure you’re as prepared as possible when the bidding starts.
Everything You Need To Know About Buying Auctioned Homes
Everything you need to know about buying auctioned homes is within your reach; you just need to know where to find it. If for nothing else, buying houses at auction isn’t more difficult than following through on a traditional sale (at least not for those that take the right steps); it’s just different. And as I am sure you already know, different doesn’t mean harder; it just means you need to look at it from a different angle.
If you are considering buying houses at auction, here’s that alternative angle you may have been searching for:
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How The Real Estate Auction Process Works
I can’t stress it enough: the real estate auction process isn’t any more difficult than following through on a traditional home purchase – it’s just different. The more familiar you get with the real estate auction process, for that matter, the easier it becomes. That said, there’s no reason you shouldn’t look into buying houses at auctions; they have some really great deals. And if that sounds like something you could get behind, here are the basics of what you could expect to encounter.
More often than not, auctions will take place at a local courthouse. Sometimes, auction companies will choose another location that comfortably fits the expected number of participants for an auction. (The goal is always to get the highest recovery amount for the lender.) Tax lien auctions, on the other hand, are generally overseen and conducted by the local sheriff, since the seller is often the government.
In each auction, there is a starting bid, usually determined by the total amount owed. If that initial bid is not met, in most cases the property is set aside and held by the lender or government to sell off in another manner in the future.
As long as that first bid is met, normal auction rules apply. The investor who makes the highest bid and can meet the auction requirements, such as a cashier’s check or payment within “X” number of hours, wins and receives the paperwork to take ownership with that property.
When an investor has paid in full they will be given a certificate of sale. And within at least 10 days, often sooner, they will be mailed a certificate of title.
Why Does Property Go To Auction?
There are several possible reasons why a home might go up for auction; the real estate auction process will vary a bit depending on why that particular house is going up for auction. However, the two most common reasons a house goes to auction are foreclosure and tax liens.
A foreclosure auction takes place after the previous owner failed to make payments over a series of months and the bank or lender has “foreclosed” or taken possession of the property. The original lender sells the house in this situation, creating the starting bid — usually the amount owed, plus fees and expenses. Auction attendees can then make that bid, or higher, to get the auction ball rolling.
A tax lien auction is similar, but the property is seized as a result of unpaid taxes or tax fraud. In this case, it is the lien being sold. Whoever owns that lien has the right to collect it from the property owner, or seize the property if they are not paid. (Note: Tax lien investing is its own nuanced strategy.
The Advantages Of Buying At Auction
There are several potential advantages to buying a house at auction:
- Potential For A Discount
- Access To Desirable Properties
- Quick Settlement Times
- Some Houses Boast A Lot Of Potetnial
While some houses will be priced higher than they are actually worth, and some will be too damaged to make them serious candidates for restoration and renovation, there will also be properties where the opening bid is a fraction of what the property is worth. There will also be undervalued properties where they are priced about right, and could be worth much more if properly renovated.
From an investor’s point of view, foreclosure and lien auctions offer the opportunity to invest in one or more of these properties at a low price. After some work, they can then sell or rent those properties for income. Most foreclosure auctions give the additional benefit of offering potential buyers ample time to visit each property, do research, and make a list of which ones interest them.
Another benefit is that there isn’t an extended time of negotiation or back and forth with a seller. This is a one-time auction; the winning bid is the winning bid. There are no other changing amounts, negotiations or fees. A bidder lines up payment, perhaps through private money lending or raised cash, and then owns the property.
How To Find Homes For Auction
Each state has its own rules, but the basics will be the same. To participate and bid in one of these auctions, an investor must register ahead of time. Registration information is generally easy to find, wherever local auction information is found, and a bidding package is provided upon successful registration.
Once you register, it’s all about research, research, research. What makes a great deal on a property not only depends on the value of the property up for auction versus the bid amount, but also how much work and renovation you must put in, and how much potential the auction property has in either resell value or rental property income.
This means doing the following in the lead up to the auction:
- Reading all due diligence documents and transaction details before the auction
- Determining an estimated market value for the property
- Driving by a property (and inspecting it from the outside)
- Getting your financing ready (most states will require immediate payment, so be sure to have either cashier’s check, cash or money order)
- Paying the pre-auction deposit (usually 5% of the total owed)
- Double-check the auction is still scheduled (many get postponed or cancelled)
- Raise your bidder card and bid when the time comes (As long as you know your numbers, and have done your due diligence, you should have a good idea of what amount you’re willing to pay to secure a property.)
Buying Auctioned Homes With An FHA Loan
Loans issued by the Federal Housing Authority (FHA) are mortgage loans that enable buyers with less capital and credit to become homeowners. FHA loans can be used to buy nearly any type of house, though the property must meet certain value and safety requirements. These regulations are meant to protect buyers from properties that are not up to code, and can come in handy when purchasing foreclosures. The process will typically involve a fee appraisal, which can be thought of as an appraisal and home inspection in one. (Though you should still have an additional home inspection done on the property.)
The main challenge buyers may face when using an FHA loan for auctioned properties is if there are any major repairs required on the property. Because auctioned properties are frequently sold as is, if they do not meet the conditions established by the FHA the home may not be eligible. However, if you are still interested in purchasing the home it may be worth looking into an FHA 203(k) rehab loan. This will allow you to purchase a home in need of repairs, though the credit requirements are higher than a typical FHA loan.
Can First Time Home Buyers Buy At Auction?
First time homebuyers can buy at auctions, though they should familiarize themselves for the process. More often than not, first time homebuyers will be going up against real estate investors with more experience at the process. The best way to prepare for this is by researching auctions, attending one or two before you are ready to buy and by asking for advice from someone who has purchased a home at an auction.
According to Really Moving, purchasing a home at auction can save you up to 30 percent on the list price—making this an attractive option for first time buyers wishing to make their budgets go further. In addition to saving money, searching for auctioned homes provides aspiring homeowners with more options in the area. If you want to start looking today set your budget, search auctioneers’ websites and begin looking for potential properties.
Can You Buy A House At Auction With A Mortgage?
You can buy at auction with a mortgage for some but not all properties. Similar to purchasing at auction with an FHA loan, mortgage lenders have certain requirements in place regarding property condition. Therefore, if you find an auctioned home that does not meet their standards you will not be able to take out a mortgage on the property. Luckily, as long as the property is in habitable condition you should not run into any problems obtaining financing.
As you may know, on auction day the winning bidder will typically be responsible for presenting 10 percent of the purchase price. If you are hoping to buy a house with a mortgage, you will need to have the details of the loan in place before actually attending the auction. Additionally, mortgage lenders will only approve the loan for how much the property is valued at (not the final sale price at the auction). Keep this in mind as you bid, and you will have no problem purchasing a home at auction with a mortgage.
Learning how to buy a house at auction may sound scary and intimidating, but it simply comes down to understanding the process—reading this article is a good step in that direction—and doing as much due diligence on the property as you can, before you put in your bid.
And while there is certainly risk with purchasing an REO property in an auction setting, there is also great opportunity. If you know your numbers—along with your exit strategy and what your local market will support—you can turn this seemingly scary investing strategy into a possibly lucrative one for years to come.
Have you ever purchased a home at an auction? Share your experience in the comments below.
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