Like many Merced rental property investors, your search for a great bargain may have you considering buying real estate at an auction. But there are many things you need to know before your first auction. Buying income properties at auction is far riskier than buying them in other ways. Although 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
Perhaps the first thing to know before buying an income property at auction is that there are both risks and benefits involved in the process. While houses sold at auction may seem to be priced below market value, many of them are in poor condition or have serious issues that will require extensive repairs. You may not be able to inspect the property before you buy, so this is one risk that may be difficult to mediate. Other risks of buying at auction include the potential to overbid in the heat of the moment and face potential delays after purchase as the property works its way through various entities, state or country redemption periods, and more.
On the other hand, auctions are one place to find real bargains on rental real estate. When you buy a property at a big discount, that can significantly improve not only your cash flows but the overall return on your investment as well. Another benefit is the potential to take possession of the property within a short time. In many situations, auctions can transfer the title on a property within 30 days, allowing you to begin preparations for your first tenant right away. That means your property could start generating rental income much faster than a traditional sale.
How It Works
The process of buying a property at an auction begins by finding real estate auctions. This can be done by searching online auction websites or databases or working with a real estate agent specializing in auctions. Once you find a potential property, your next step is to find out as much as you can about the property. Be sure to do a thorough 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 do your research. Check if there are any occupants, liens, or other potential problems that may create roadblocks to ownership.
To bid competitively at an auction, it’s important to have plenty of cash on hand as well as financing lined up before you start to bid. In many cases, 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. In addition, there are different types of auctions, so be sure to thoroughly review all of the auction rules and be prepared 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 arrive about an hour before the auction starts to check-in and get your official bidding card, which you will use when you bid. If the auction is online, you’ll log in to the auction website to make your bid. Once the bidding begins, 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, your risk of paying too much will significantly diminish.
You will know within minutes whether you’ve won your auction or not. If you don’t win, you will receive a refund of your deposit. However, if you win, you may need to pay for the property in full immediately after the sale. Some auctions require you to bring cash or money order with you to complete your payment on the spot. Others will give you until the next day, or perhaps several days, to submit the required funds. Failure to do so will result in losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so it’s important to complete payment as requested. Then, 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 challenging but fulfilling endeavor. Real Property Management Valley Wide 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 209-722-7761.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.