If you’re looking to buy an investment property, you have to be open to finding them through sources you may not have considered in the past. 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 on investment without much marketing required: auctions. Attending local auctions can result in a truly great deal for patient investors, which begs the question: How does a house auction work? Better yet, how may today’s investors transform buying a house at auction into the opportunity of a lifetime.
Unfortunately, many new investors are scared of buying houses at auctions and are otherwise unsure how to make an offer on an REO (real estate owned) property. Fortunately, the foreclosure auctions process doesn’t need to be intimidating, nor should investors avoid it. Instead, it’s time to read up on buying a house at auction. In doing so, investors can answer their most pressing questions: How does a house auction work? How does one join a real estate auction? What can you do to boost your chances of finding a winner?
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 House Auctions
Everything you need to know about buying auctioned homes is within your reach; you 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 Does The Real Estate Auction Process Work?
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 slightly 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 occurs 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 due to 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.
What To Look For In A House At Auction
Prospective buyers of auction homes need to mind just as much due diligence with their purchases as traditional acquisitions, if not more so. If for nothing else, the goal is the same: to buy a home that can be rehabbed and sold for more money than the original purchase price. That means people buying a home at auction need to look at every detail they would account for when buying a home using traditional means. That said, auction homes coincide with additional criteria that buyers need to keep in mind. In particular, people buying a home at auction will need to pay special considerations to the subject property’s condition. It is common for auction homes to sit vacant for a long time, making them susceptible to neglect, mold, and vandalism. Therefore, at the very least, make sure the condition of the home meets your own criteria. That may mean checking to see if all the copper pipes are still in place or conducting mold remediation.
The Advantages Of Buying A House 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 Potential
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 depends on the property’s value up for auction versus the bid amount and 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
The Federal Housing Authority (FHA) loans are mortgage loans that enable buyers with less capital and credit to become homeowners. FHA loans can be used to buy nearly any 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 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 any major repairs required on the property. Because auctioned properties are frequently sold as is, if they do not meet the FHA conditions, 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 with the process. More often than not, first-time homebuyers will be going up against real estate investors with more experience in the process. The best way to prepare for this is by researching auctions, attending one or two before you are ready to buy, and 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 financing problems.
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 loan details before actually attending the auction. Additionally, mortgage lenders will only approve the loan for how much the property is valued (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.
Inspecting An Auctioned Property
Auction properties are sold in as-is condition, and in most cases do not allow bidders to request official home inspections. So, in lieu of the real deal what do you do? The best piece of advice is to assume the property’s condition on the outside hints at what it’s like on the inside. If the yard and exterior are in poor condition, showing signs of rotting, or more — it’s safe to guess the inside could look similar.
Remember that properties are auctioned after the owners are unable to pay for their mortgages. In these extreme circumstances, it is typically unlikely that the owners had access to fund repairs or even general maintenance. For this reason, many auctioned properties are in an understandably neglected state.
All of this is not to say you cannot do some research. Drive by the property, and consider asking neighbors what they know. Inquire with local real estate agents or past photos when the property has been on the market. Never, under any circumstances, should you trespass on the property. If you are unable to gather any information at all, consider skipping that home for the next one. While your financing may cover extensive repairs, you cannot always predict the depth of the costs you will incur.
There are certain areas where bidders will be able to walk through properties before an auction. If the above information makes you feel weary about investing in an auctioned property, seek out these homes. Remember, investors would not buy these properties if they were all losses. There are numerous opportunities out there in auctioned homes.
How does a house auction work? More importantly, how may today’s investors take advantage of auctions to further their careers? Hopefully, this guide provided you with the answers to many of your most pressing questions regarding home auctions. At the very least, learning how to buy a house at auction may sound scary and intimidating. Still, 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.
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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