General conception among regular home buyers is that purchasing an auction property is risky, but the auction is one of the most favorite places for real estate investors to find hidden gems. Auctions present great opportunities to people who are willing to take calculated risks.
Whether you are a novice buyer or an experienced real estate investor, you should keep auction properties on your checklist if you are in the market looking for a foreclosure house. However, before bidding at auction, you should first familiarize yourself with the process. Since foreclosure laws state-specific, there may be a few minor differences in how auctions are conducted in your area, but the procedure is broadly generic. Here is the step-by-step process to buying at auction:
1. Know How Properties End Up At Auction
There are mainly two reasons for a property to end up at auction, one: the owner fell behind on mortgage payments and two: he or she didn’t pay property taxes or became severely delinquent on income taxes. Since you are interested in buying a foreclosure, you may want to participate only in mortgage auctions.
An important thing to keep in mind is that an auction property may carry financial liabilities such as tax liens, contractor liens, or a second mortgage. So once you buy the property, these liens are also passed on to you. This is one of the major differences between an auction property and a real estate-owned (REO). Before selling a REO property through traditional methods, the lender has to make sure that it is free of all the liens and the title is clear.
2. Look At Several Properties Before Auction
You should keep a tab on distressed properties in your area. You should check out the listing of these properties online and visit your local county office to get information about their location and mortgage history. You can drive by these properties to get a feel for their condition and the quality of the neighborhood. You can talk to neighbors and get a lot of useful information including material defects and other issues related to the property. Collecting information about a lot of auction properties ahead of time will help you determine whether any of them is a good deal and what should be your bidding amount.
Auction companies occasionally organize open houses, giving potential buyers an opportunity to walk through the properties.
If you think a property is a good fit for you, you should determine your maximum offer price:
- Determine the market value of the property by conducting a comparative market analysis (CMA).
- Prepare an estimate of potential repair and renovation costs.
- Find out liens against the property.
- Know how much is owed on the property.
- Make sure the property is in an excellent location.
Many investors believe that a property at least 20 percent below the market value can be considered a good deal depending on its condition.
3. Know The Auction Date And Place
You can get all the necessary information about auction date and its location from the county office or foreclosure listing websites. However, be warned that it is very common for auctions to be postponed at the last moment. Most jurisdictions give homeowners the right to stop the auction by paying off the outstanding mortgage. Other unexpected circumstances may also come up, leading to postponement at the last moment. You should keep in touch with the trustee and country clerks to know about cancellations ahead of time.
4. Be Prepared To Pay Cash And Have Your Finances In Order
Find out ahead of time if financing will be accepted at the auction. Only cash bids are allowed at some auctions. Real estate investors usually buy auction properties for cash, so be prepared to compete against them. Get prequalified from a lender if financing is allowed.
You will be required to bring a cashier check to the auction to pay any auction fees and make earnest money deposit if you are the winning bidder.
5. Follow A Strategy When Bidding
Find out the starting price of the auction. It is usually the balance remaining on the mortgage or may be a lower amount designed to spur bidding. Since you have already determined your maximum offer price, you should never feel tempted to increase it during an auction in the bidding frenzy.
6. Carefully Go Through Documents
You will have to make the earnest money deposit before leaving the auction site if you are the winning bidder. You will go through escrow and closing just like with a normal property transaction. It is crucial to collect all the necessary documents from the auction holder if you are the winning bidder. Talk to an experienced real estate lawyer and understand various milestones and timeline during the property transaction process. If a court’s approval is required for the sale’s confirmation, the closing may take a lot of time.
Educating yourself about the bidding process can help you avoid common pitfalls. There is no doubt about the fact that buying an auction property is risky, but these properties are worth exploring to pick up a home or an investment property on the cheap.