Real estate auctions have become increasingly popular with people buying a house for investment. This is because auction properties are usually priced below market value and make for a great bargain in a housing market with rising property prices.
A Quick Intro to Real Estate Auctions
There are two main types of property offered for sale at an auction: houses repossessed by governments due to unpaid property taxes and those repossessed by banks through foreclosure (bank-owned homes). At other times, the property might need to be auctioned off because:
- The owner is undergoing bankruptcy
- A couple going through a divorce wants to sell the home fast
- The homeowner dies and the heirs don’t want the inherited property
When it comes to how to buy a house at auction, there are three types of auctions real estate investors should know about:
- Absolute auction – In this type of auction, the highest bid wins. Whether it is $2 or $1,000, if your bid is the highest, you become the proud owner of investment property! Since there is no minimum bid, absolute auctions elicit a maximum response from potential home buyers and real estate investors. This type of auction is especially popular for foreclosure auctions.
- Minimum bid auction – As the name suggests, there is a minimum amount that buyers must bid to be in the running for buying a house at auction. This minimum bid is usually published in advertisements on newspapers and online real estate auction platforms. Auctioneers also announce it before bidding on a house begins. Sellers prefer this option since it minimizes the risk of losing money.
- Reserve auction – Here, the highest bid is considered an offer to the seller. The seller is then required to reject or accept the bid within a set period of time.
The Pros of Buying at Auction
- Helps avoid the usual lengthy process of buying an investment property, especially for a first-time buyer. As soon as the hammer falls, the highest bidder gets the property.
- Quirky or unusual investment properties that are not available elsewhere can be found through buying an auctioned home.
- If the property has not generated much interest, buying a house at auction can get you a great real estate deal.
The Cons of Buying at Auction
- Buying real estate as an investment at auction is riskier than purchasing through the normal process. Buyers must be well versed with how the real estate auction process works to avoid any mistakes.
- Some auctions don’t allow buyers to inspect the interior of the property before buying a house at auction. Therefore, buyers risk ending up with investment property in poor condition.
- Auctions can be a dumping ground for properties with short leases, restrictive covenants, defective legal titles or even unregistered properties.
Related: 6 Mistakes to Avoid at a Property Auction
So, How Does Buying a House at Auction Work?
If you are wondering how to buy a house at auction, here are 7 easy steps for you to follow:
1. Find a real estate auction
The first question you’re probably asking is “How can I find a real estate auction near me?” Well, one of the best ways to find real estate auctions is by visiting local government offices and making an inquiry. Alternatively, you can look out for information on their websites or newspapers, and then follow up via phone call or email.
Auction websites such as Auction.com, MLS, and RealtyTrac are also great sources of information on real estate auctions. You can find Auction.com listings in the Mashvisor Property Marketplace right now. You could also consult real estate brokers and agents to get updates about auctions in your target housing market.
2. Arrange property viewings
Once you have identified some houses you are interested in, organize viewings with the auctioneer. Preferably, get an architect, surveyor or builder to accompany you for the viewing. Properties sold at auction usually require a lot of repairs. Get an estimate on the cost of repairs and decide whether buying a house at auction is a feasible investment or not. If possible, view the property multiple times since the conditions can change any time.
Related: How Much Does a Home Inspection Cost in 2019?
3. Conduct investment property analysis on the auctioned home
Investment property analysis is a crucial part of how to buy a house at auction. Even though you may be getting a good deal, you are not looking for a place to live- you are looking for a rental income property that will make you money and only investment property analysis will reveal if that is what you have on your hands.
The Mashvisor Property Marketplace is one of the best platforms for finding and analyzing property before buying a house at auction. It comes with a state of the art investment property calculator which you can use to check the real estate investment potential of a house. You can analyze an investment property using metrics such as comparable rental income, cash flow, cash on cash return, cap rate, and occupancy rate. This analysis can be viewed in a very easy to read pdf report.
4. Check for any liens, claims, and occupants
This is one of the most important steps in how to buy a house at auction. Some houses being sold at an auction come with claims such as contractor liens, tax liens, and even a second mortgage. Therefore, be sure to check with the auction house to ascertain that the house has a clear title. At times, a squatter or the former owner might still be occupying the house. The process of evicting them could be very lengthy, expensive, and unpleasant. Make sure the issue of occupants is dealt with before making a bid.
5. Get your investment property financing in order
To buy homes at auction, you need to ensure that your finances are in order. On the day of the auction, make sure you have the 10% deposit. You will be required to clear the remaining 90% within about 28 days (failure to do so will result in the loss of the investment property and the deposit). Other costs that real estate investors should keep in mind include:
- An administration fee to the auction house
- Survey costs and conveyancing fees
- Stamp duty owed on the home
- Building insurance for the investment property once you buy it
If you need a mortgage to buy the auction property, it would be advisable to get a pre-approval letter before bidding on the house. If you want to complete the transaction fast, consider other financing options such as bridging loans and auction financing.
Related: How to Buy a House at Auction Without Cash: An Investor’s Guide
6. Prepare for auction day
On the day of the auction, arrive at the venue early and find a seat with a good view of the auctioneer and the room. Be sure to have proof of residency (such as a utility bill or passport) and photo identification. During the bidding process at live auctions, keep a cool head and stick to your budget. When bidding for good auctions, don’t be tempted to bid more than you can actually afford. If you cannot be there in person, you could ask a solicitor or a real estate agent to bid on your behalf. For online auctions, bidding on a house online or via telephone is acceptable.
7. Be ready to close fast
If you win the bid, you should be ready to act fast. Usually, auctions require a 10% deposit on the day and the balance within 28 to 45 days after the auction sale. Any completion details and outstanding costs will be outlined clearly in the conditions of sale.
Now that you know how to buy a house at auction, start looking for auction homes in the Mashvisor Property Marketplace.