When looking to invest your hard-earned money, few possibilities are as endless as real estate. There are so many different formats of real estate investing—buy and hold, flip and sell, residential, rental, commercial, and so many more.
There are numerous avenues to purchase real estate properties in today’s day and age. For investors, however, one of the best opportunities to secure great investment deals, particularly on single-family houses, is a real estate auction.
What is a Real Estate Auction?
A real estate auction is an extreme, accelerated method of buying or selling a property. These are often properties that are pushed for a quick sale, such as bank foreclosures, inherited properties, or tax-lien defaults.
These properties are often resold through real estate auctions at a fraction of the average market value as they are priced for a quick sale. Real estate auctions are generally open to the public and are often completed online these days.
What Types of Properties are Sold at Auction?
Real estate auctions are a smorgasbord of real estate options. It isn’t unusual to see just about any form of property pop up while attending one of these events. For those looking for investment purposes, the best deals are often single-family homes that have been foreclosed on or revoked due to tax liens. These are quickly so that the institution holding the title can recoup the remaining balance.
You can often find single-family properties going for almost half of what the going market rate is if you spend enough time on the auction circuit.
Do Your Research!
Before you even consider making any bids on an auction property, do your research. While the price may seem like a great steal, verify the numbers line up. If the neighborhood is dodgy or the area has a high unemployment rate, you’re not going to be able to recoup even the smallest investment you put into it. As auctions are often cash-only deals, be prepared to have that much cash on-hand. Whether you have the money saved already or you’re banking on using a hard-cash loan, make sure you know your budget before the day of the auction. These things move quickly and you won’t be able to run numbers on the spot. Make sure that you calculate your maximum bid and stick to that figure. Bidding wars can be heated, and it can be easy to get swept away in the moment when your adrenaline gets going. Getting carried away at an auction can be dangerous as you may not be able to recoup the amount you bid after taking ownership.
In addition to researching the listed auction properties and your budget, get a good grasp on how the auction house functions. Every auction house is different. Some are in-person only. Some are digital. Some are both. Each auction house may have different rules for how to place your bids and each property might also have specific regulations. Having a clear understanding of the process will help you avoid any confusion in the hustle of the event.
Some properties may require liens to be paid off in addition to the winning auction price, so make sure you clearly understand all due diligence documents that are provided before making any bids. Always ensure you are bidding on the first-position lien. In some cases, properties may become available as a secondary lien—meaning they are outranked by the first-position lien. These properties are extremely risky purchases, as the secondary liens can be eradicated by the first-position lien going into foreclosure. Verify you are not bidding on a secondary lien by requesting a preliminary title report from a title company.
Don’t forget to verify the property’s overall condition. A small profile picture of a house isn’t a good indication of the quality of the inside. If you get a great deal, but have to spend a fortune to remodel the home to livable, rentable conditions, you’re not really getting that great of a find. If you are in the area of the property’s location, do a physical visit to determine the condition yourself. If you do not live in the area, consider reaching out to a real estate professional to inquire about the internal workings of the home. Even if you have to pay a small fee to an agent to check it out in your stead, it will be well-worth it to avoid purchasing a money pit.
Once you have gotten a full understanding of the property, your budget and financing, and how the process works, get your hands dirty. When purchasing a property through an auction, it is always a safe bet to purchase title insurance. If a property has a quit claim or special warranty deed, the bank’s interest transfers to the new owner—you—at the time of closing. Sounds great, right? Well, any unascertained liens will also transfer to the new owner at the time of closing. If you invest in title insurance, however, you will be protected against these risks.
Buying property for investment purposes, particularly rental, is an exciting process as it is, but if you opt to purchase through an auction—be prepared for a high-stakes, fast-paced adrenaline rush. While it may seem daunting at first, purchasing through an auction can give you the greatest deals you’ll find on single-family homes on the market.