Like most Eagle rental property investors, when you look for an excellent bargain, you might be thinking about buying real estate at an auction. However, there are numerous things you need to comprehend before your first auction. Buying income properties at auction is far riskier than getting them by other means. 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 understand the fundamentals of successfully buying a rental home at auction.
Risks and Benefits
One of the primary things to note before buying an income property at auction is that the process contains both drawbacks and benefits. While houses sold at auction may appear to be priced below market value, many of them are in poor condition or have serious problems that need full repairs. You may not be able to inspect the property before you buy, so this is one risk that may be hard to keep away from. Additional risks of buying at auction include the potential to overbid in the heat of the moment and facing possible delays after purchase as the property works its way through multiple entities, state or country redemption periods, and so on.
However, auctions are the best spot to discover real bargains for rental real estate. When you acquire a property at a big discount, that can significantly boost not only your cash flows but the overall return on your investment as well. Another advantage is the potential to take possession of the property within a short time. In general, auctions can transfer the title on a property within 30 days, allowing you to begin preparations for your first tenant right away. Because of that, your property could begin generating rental income much faster than a traditional sale.
How It Works
The process of buying a property at an auction starts by finding real estate auctions. You may do this by searching online auction websites or databases or by interacting with a real estate agent specializing in auctions. Once you discover a potential property, your next goal is to find out as much as you can about the property. Don’t forget to conduct a full comparative market analysis and evaluate the property’s potential as a rental home. If necessary, walkthrough or arrange for an inspection of the property. If that is not achievable (because it isn’t always), you could drive by and peek in the windows. In your research, you should conduct an inspection. Verify if there are any occupants, liens, or other legal threats that may create an obstacle to ownership.
To bid competitively at an auction, you should have sufficient cash on hand as well as financing lined up before you start to bid. In several scenarios, 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 general), and cash for administrative fees, survey costs, and insurance. Moreover, since there are different types of auctions, you must critically analyze all of the auction rules and be sure to support 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, you should arrive about an hour before the auction starts to enroll 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 whether you’ve won your auction or not within minutes. If you don’t win, you will gain a refund of your deposit. But if you win, you will need to pay for the property in full immediately after the sale. Some auctions encourage you to bring cash or money order with you to fulfill your payment right away. Others will give you until the following day, or probably a few days, to deliver the required funds. Failing to do so would lead to losing the sale, forfeiting your deposit, and even being banned from participating in future auctions, so it’s important to complete payment as required. 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 rewarding endeavor. Real Property Management Boise 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 208-494-1800.
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