Just as several Durham rental property investors, your search for a great bargain may drive you to consider buying real estate at an auction. But there are a few things you need to consider before your first auction. Buying income properties at auction is far riskier than purchasing them in other ways. Even though having good information and a strategy can help reduce some of that risk, real estate auctions will never be right for the faint-hearted – or risk-averse – investor. Those comfortable with some risk, keep reading to learn the basics of successfully buying a rental home at auction.
Risks and Benefits
The principal thing to remember when buying an income property at auction is that there are both benefits and risks in the procedure. Even though houses sold at auction may appear to be priced below market value, many of them are in poor condition or have critical problems that will require huge repairs. You may not be able to inspect the property before you buy, so this is one risk that may be hard to avoid. Other risks of buying at auction include the potential to overbid in the heat of the moment as well as potential delays after purchase as the property works its way through various entities, state or country redemption periods, and so forth.
On the other hand, auctions are the best spot to seek real bargains on rental real estate. When you buy a property at a large discount, you will increase not only your cash flows but also your total return on your investment. Another advantage is its ability for you to take possession of the property within a short time. Generally, auctions can transfer the title on a property within 30 days, allowing you to begin preparations for your first tenant immediately. That means your property could start generating rental income much faster than a traditional sale.
How It Works
The way to buy a property at an auction begins by finding real estate auctions. This can be reached by searching online auction websites or databases or working with a real estate agent specializing in auctions. After you find a potential property, your next step is to find out as much as you can about the property. Make certain to do a complete comparative market analysis and evaluate the property’s potential as a rental home. If possible, walkthrough or arrange an inspection of the property. If that is not possible (and often it is not), you could drive by and peek in the windows. In your research, you should investigate thoroughly. Inspect if there are any occupants, liens, or other potential problems that may create obstructions to ownership.
To bid competitively at an auction, it’s necessary to have plenty of cash on hand as well as financing lined up before you start to bid. On many occasions, to buy a property at auction, you will need at least 10% of the selling price for a deposit, the ability to pay the remaining balance immediately (or within a matter of days, in some cases), and cash for administrative fees, survey costs, and insurance. Additionally, there are different types of auctions, so be sure to thoroughly analyze all of the auction rules and make sure to follow them.
What to Expect
Before you can bid in a real estate auction, you will need to register and submit a refundable deposit of 5% to 10% of the property’s expected selling price. If the auction is in person, plan to come about an hour before the auction starts to register and get your official bidding card, which you will use to place your bid. If the auction is online, you’ll log in to the auction website to make your bid. When the bidding starts, you will need to know exactly how much you can offer before the property is no longer a bargain. If you can avoid a bidding war, the chance of paying too much will decrease greatly.
You will know whether you’ve won your auction or not within a minute. If you don’t win, you will receive a refund of your deposit. However, if you succeed, you may need to pay for the property in full immediately after the sale. Some auctions will request you to bring cash or money order with you to settle your payment instantly. Others would allow you to pay the required funds until the next day, or even for several days. Failure to do so will lead to losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so it’s recommended to complete payment as needed. At that time, even though you won the property at auction, you will still go through escrow and closing, just as you would when buying any other property.
Growing your investment portfolio – through auctions or any other means – can be a difficult but rewarding undertaking. Real Property Management Impact offers free market rent evaluations, and we’re willing to give you advice on any potential properties you’re considering purchasing. You can contact us online or call at 919-439-8989.
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