How to buy real estate at auctions

The Multiple Listing Service (MLS) is the tried-and-true way to find real estate deals, but you won’t find the potentially most profitable off market deals there. So, many experienced “fix and flippers” and developers find attractive deals at real estate auctions.  However, there are pros and cons in buying properties at auction. It is important to examine all available options before investing money in a property at auction. In this short article we will discuss how to buy real estate at auctions.

  Buying property at an auction generally eliminates regular homebuyers and real estate beginners from the buying competition. They do not attend auctions for many reasons, including:

• Most auctions require a large nonrefundable deposit.

• A successful bidder is required to sign the sales contract right then and there.

• Auction properties are not available for walk-through before the auction.

 

We’ll address each of these factors, which turn off many buyers who may not want to risk large deposits or enter into contracts that they might find dubious .

While the conditions of landing a property at an auction may be off-putting to some, there are many benefits to doing so.  The most obvious is

PRICE

Properties listed at auctions can often be acquired at a price well below market value. In most cases, the sellers who list properties at auctions are not primarily concerned with getting top dollar, but want to get rid of their assets quickly. That opens opportunities for real estate entrepreneurs.  Not surprisingly, auction properties often have unfortunate stories attached to them.  Most commonly there are tax or liabilities issues, crimes, court orders or inheritance issues involved.

Inspection? Nope!

With rare exceptions, potential buyers cannot see a property before bidding on it which, of course, makes the transaction very risky.  Most successful bidders are governed by the familiar three rules of real estate: LOCATION, LOCATION, LOCATION. In other words, they bid based on the prospective market value of the basic structure only.  They must estimate the construction budget without full knowledge of the property .  Some bidders get “creative” and try to get inside properties before the auction date; others just examine the exteriors and try to assess interior conditions through the windows when possible.

Don’t Overpay

It is easy to overpay for a property at an auction because, even though the location may be good, the budget for needed construction may be exceed expectations.  Or a bidder can lack discipline, get overexcited about the property and bid too much for it.  These  bidders can raise the price too high simply because they don’t know what they are doing.

Successful real estate developers KNOW what their top bid will be BEFORE attending the auction (that strategy is the same for any auction, negotiation, or, for that matter,  gambling.)  While it’s easy to overbid, thinking that other people must “know something” if they bid high, that is rarely the case.

Getting Pre-approved

The rules of each auction are published prior to the auction and, often, bidders must be pre-approved before being admitted to the auction. Syberloans.com can provide our clients with a pre-approval letter and help them get pre-qualified for financing.

It’s a common misconception that auction properties can’t be financed, or must be financed outside of the auction sale process.   However, the remainder of the purchase price after the deposit can be financed. Most auctioneers allow 60 days for this process, enough time for a hard money lender to issue funds. A hard money loan is a quick and easy option to finance property rehabilitation. Syberloans.com has a list of lenders that provide hard money loans in every market.  Keep in mind, however, that, if financing falls through, the buyer will lose the deposit.

Bring Lots of Money

Auctioneers may require a  large denomination money order or a large amount of cash as a deposit, amounting to 10% or more of the bid price.  There are no financing contingencies or home inspection contingencies allowed, so you cannot change your mind after winning a property at auction. And if you don’t process the contract, you will lose your deposit.

In addition, some auctioneers tack their fees onto the amount of the deposit.  Such expenses are out of pocket and cannot be financed or refinanced later.

Sound Practices

There are a few things that any “fix and flipper” or real estate developer should always do:

• Attend a few auctions just to observe so you have an idea how things work. For example, you’ll see aggressive bidders in action and be able to avoid being intimidated when you are actually bidding.

• View the property before its sale. It helps understand the location and amenities available, as well as the apparent condition of the structure and land.

• Get to the auction sale on time so you hear the auctioneer recite the terms and conditions of the property being sold. Any unclear point in the documents should be clarified with the auctioneer or a lawyer, right then and right there, before you sign anything.

• Be well-prepared to make your investment. Before going to the auction, Syberloans.com can provide our clients with a pre-approval letter and help them get pre-qualified for financing.