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When buying at a real estate auction, there are six steps you should know. With these tips in mind and the right budget, it’s never too late to buy your dream home!
Houses are purchased at auction in a quick and efficient manner, with undervalued homes being sold to the public via competitive bidding. Fix & flippers and long-term investors alike may benefit from auctions, which can be held in person or online. The majority of auctions need a 5% to 10% deposit, with the remaining due in 30 to 45 days (if you win).
The following are six stages to purchasing a home at auction.
1. Gain a thorough understanding
Real estate auctions provide a diverse selection of properties at various price ranges. Single-family residences and multifamily apartments, as well as certain commercial buildings and real estate notes, are all included. Foreclosures, short sales, and non-distressed real estate are all auctioned (REO). Additionally, auctions may be held either online or in person.
Real estate auctions may place in real-time or over a few weeks and begin with a low starting bid. Following that, an auctioneer will enable competing bids to raise the property’s price until only one bidder remains. The auctioneer will then call the auction to a conclusion and give the item to the highest bidder. Depending on the auction, the bidder may be required to pay for the property in full right away or pay a 5 percent to 10% deposit and the remainder within 30 to 45 days.
A widespread myth about purchasing properties at auction is that you may only buy them all-cash. This is not the case. While auctions favor all-cash bidders, regular loans may still be used to finance a home at auction. However, there is a risk that approval may take too long. Of course, do your homework before making a financial choice.
2. Determine the parameters of your investment
Setting your investing criteria is the next stage in purchasing property at auction. Know exactly what you’re searching for in a home and what your limitations are. Each element narrows your investment search to more particular options and aids in the following stage of finding an auction.
When deciding on your investment parameters, keep the following things in mind.
Timeline and Investment Goals
Before bidding on a property at auction, you should determine your individual investment goal and accompanying timescale. These factors will have an impact on your financing possibilities, as well as the size, location, price, and condition of the homes you bid on.
Fix-and-flippers and rehabbers, for example, seek houses that they can swiftly fix and resell for a high after-renovation value (ARV), which is the price of a property after it has been repaired. Short-term investors often want the ARV to be 30% greater than the purchase price and the period to be as short as feasible. The longer your timetable, the greater your carrying expenses, therefore getting the repairs done as soon as possible is critical.
A long-term investor is less concerned about ARV since they want to maintain the property and rent it out. Instead, the loan-to-value (LTV) ratio is more important to them. Long-term investors, although having a longer investment horizon than fix-and-flippers, also want to season the property rapidly since they have carrying expenses. Because various scopes of projects require varying amounts of time to complete, there is no definite defined timetable in weeks or months.
Real Estate Auction Financing Options
The funding alternatives offered are determined by your goal and investment timetable. The recommended form of payment for an auction is all-cash offers. All-cash bids are exempt from lender constraints, allowing for faster transactions between the bidder and the seller.
If you can’t afford to buy an auction property outright, you’ll need to get financing from a lender. The investment goal and timetable are crucial at this point. Hard money loans are often used by short-term investors, such as fix-and-flippers, to fund their investments. Long-term investors, like buy-and-hold investors, often employ longer-term conventional mortgages. These financing alternatives have an impact on your total auction budget.
Below, we go through the various financing alternatives in detail.
Budget Limits
Your entire budget is influenced by your investment goal, schedule, and financing alternatives. Hard money loans with an ARV restriction are often used by fix and flippers. Many hard money lenders give between 65 and 80 percent of the ARV of a house. This implies consumers may have to pay down as much as 35% of their budget, severely restricting their options.
Long-term investors, on the other hand, depend on standard mortgages, which typically need a 20% down payment. This results in a maximum loan-to-value (LTV) ratio of roughly 80%, as well as a loan-to-income (LTI) ratio of around 50%, restricting the budget of a long-term investor. The LTV ratio determines how much of the total price a bank can lend, whereas the LTI ratio assists banks in determining a borrower’s capacity to repay the loan. Long-term investors, on the other hand, may get FHA loans with as low as a 3.5 percent down payment.
It’s vital to know that successful bidders are assessed a “buyer’s premium.” This is a charge given to the auctioneer to cover all of the auctioneer’s administrative costs. The buyer’s premium is normally approximately 10% of the winning offer and is revealed prior to the commencement of the auction. Make sure you have at least a 10% contingency set up to meet the buyer’s premium.
Budget for the following items in general:
- Costs of financing: The down payment should be between 20% and 35% of the purchase price, plus one to three points on top of any extra lending expenses.
- Monthly expenses to maintain the property, such as the mortgage, taxes, insurance, and utilities.
- Repair costs: The cost of repairs, materials, and labor, which vary greatly depending on location and property condition.
- Marketing expenses: The amount you’ll need to spend to sell or rent the home, including advertising and open house charges. Some individuals also add real estate agency fees, which are normally 6% and are paid from the selling earnings.
Features of the Property
The features of the properties most suited for your requirements are determined by your investment goals, timetables, financing, and maximum budget. When defining your investment requirements, you’ll want to consider the size, condition, location, and kind of property.
Long-term investors want stable assets with rental potential, which narrows the pool of alternatives. The size, quality, and location of a home, for example, have an impact on its occupancy rate and target renters, as well as the amount of the minimum down payment. The condition of a home has an impact on the initial pricing. Before it may be hired, it may need repairs and upkeep. Its location has an impact on long-term price appreciation, yearly rental revenue, and tenant availability.
Short-term investors hunt for residences that are underpriced and in bad condition, narrowing their search. A short-term investor’s down payment and “skin in the game” are influenced by the desired size, quality, and location of a home. Because hard money lenders base their loan amounts on a percentage of ARV, the more money down a home requires. A repair and flipper’s potential short-term profit is also influenced by the size, condition, and location of the property.
New investors may only examine single-family houses or condominiums, however, more experienced investors may seek multifamily properties or apartment complexes with one to four units. Certain sorts of properties are more common in certain places, which may restrict your choices.
Furthermore, the location of a home determines which contractors and/or property managers you will choose. Long-term investors should search for established property management businesses, while fix-and-flippers should make sure there are reliable contractors accessible to complete the work when required. It might lengthen your entire investment timeline and cost you money if you’re unfamiliar with a location. It’s better to stick to what you’re familiar with.
3. Attend a Real Estate Auction and register.
Real estate auctions are done both in-person and online. Live auction listings are available on major auction websites, as well as via real estate brokers and other industry experts. Virtual auction listings can also be found on popular auction websites, as well as through industry professionals and virtual auction sites.
The kind of property, size, beginning bid price, needed deposit, registration procedures, auction date, appraisal, and other details are all included in a real estate auction listing.
Where Can I Find a Listing for a Real Estate Auction?
A real estate auction listing might be found in one of four ways. Different investors are at ease with different methods of locating these assets. Each method has advantages and disadvantages to consider, but it’s preferable to seek auction listings in many areas to increase your chances of discovering them.
Real estate auction sites, industry experts, county courthouses, and real estate classifieds are the four methods to discover a real estate auction listing.
Real Estate Auctions Sites
There are several online real estate auction platforms, some of which provide both in-person and virtual auctions, while others just provide virtual auctions. Check out the websites and look around to see what kinds of auctions they have and what the auction requirements are, and then start looking for houses to bid on.
The following are some of the most popular real estate auction websites:
Professionals in the field
Real estate professionals are often informed about future auction listings. Real estate agents, brokers, and third-party foreclosure sales agents, commonly known as “trustees,” are among these professions. When seeking jobs, bankruptcy attorneys and bankruptcy accountants are also valuable contacts.
You may identify industry specialists by asking friends, relatives, and other investors for recommendations. You may also join a local real estate investing club or contact your local real estate agent who deals with real estate auctions at their office. Agents that specialize in auctions may be found at almost every major real estate firm. You may also find bankruptcy, divorce, and foreclosure lawyers by doing an internet search using a major search engine.
The Courthouse of the County
A list of all forthcoming real estate auctions in the region may be found at your local county courthouse. This option, on the other hand, restricts your search to the county in which you live. You may find information on real estate auctions online at your local courthouse website or in person at the courthouse.
To contact your local courthouse, do an online search for the URL of your county’s website and go to the homepage, which has contact information. They’ll be able to take you to their auction website and inform you what buildings are up for sale and when they’re going to be held.
Classifieds for Real Estate
Real estate auctions continue to advertise properties in local publications, notwithstanding their antiquity. Some of these publications also have an online presence. It’s recommended to use real estate ads in conjunction with another way of locating auction property listings.
Real estate auctions: In-person vs. Virtual auctions
Live real estate auctions take place in person and are arguably the most common kind of auction. Live auctions are available to the public and are free to attend. Virtual auctions take place virtually, or online, and might take place in real-time or over a few weeks.
Real-Time Real EstateAuctions
Prior to attending a live real estate auction, all bidders must first register. Following the directions on the auction page, you may register online. You will be asked to produce verified evidence of adequate cash as part of the registration procedure.
This is usually a cashier’s check in the amount of 5% of the starting bid price made out to yourself. The auctioneer will normally check to see whether you’re registered and have made the proper deposit. If you win your live auction, you must pay between 5% and 10% of the final bid amount within 24 hours.
Following that, you’ll have 30 to 45 days to complete the payment and transfer the title. If you miss a payment, the auction house will retain your deposit and re-sell the residence. Until the whole amount is paid, some live auctions levy interest on the money outstanding. In the sections below, we go further into live auctions.
Auctions of Virtual Real Estate
Virtual real estate auctions, on the other hand, are online-only real estate auctions. They may take place in real-time, like a live auction, or they might take days or even weeks to complete. Long auctions nowadays allow participants to bid 24 hours a day, seven days a week, until the auction listing ends.
A bidding countdown clock is used in real-time auctions, which are usually two to three minutes long. If no one offers before the timer runs out, the property is given to the highest bidder. The clock restarts if someone bids inside the time limit. Participants in virtual real estate auctions may even use proxies to automatically put bids if they are outbid. Consider a virtual auction to be the eBay of real estate.
Virtual auctions, like live auctions, require all prospective bidders to register online through the virtual listing. Bidders must register and submit a 5% deposit before bidding on a piece of real estate, which restricts the maximum budget in a virtual auction. Cash, certified check, or credit card may be used to make the deposit.
Virtual auctions, unlike live auctions, require the successful bidder to pay in full within a 24-hour period. The virtual auction business maintains the 5% down payment and re-auctions the property if the bidder fails to pay. In the sections following, we go through the virtual auction procedure in detail once again.
Types of Real estate auctions
Keep in mind that there are three main sorts of auctions while looking at real estate auction listings. Each auction has its own bidding conditions, which influence the kind of assets featured and the investors that attend.
Auction with no reserve
An absolute auction is a kind of traditional real estate auction in which the property is sold to the highest bidder regardless of the ultimate price. These auctions might be held in person or online. The property may sell for any price, thus there is no minimum bid amount. Absolute auctions are used by sellers in need of immediate cash.
To recuperate part of their unpaid debts, banks, for example, run absolute auctions for foreclosures or non-distressed REOs. Absolute auctions for short sales are also held by people in financial trouble. Absolute auctions are typically attended by all-cash buyers and short-term investors.
Auction with a Minimum Bid
A real estate auction in which the property’s seller may establish a minimum reserve price. The property will remain unsold if the winning offer does not reach the reserve requirement. Minimum bid auctions are most common during estate sales and sales of property if the owner isn’t in a hurry to sell. They may take place both online and in person.
If a bank doesn’t need to sell a foreclosure fast and just wants to reclaim a certain amount of overdue debt, it may hold a minimum bid auction. Minimum bid auctions attract more long-term investors as a result of these factors, however, short-term investors also participate.
Auction with a Reserve
The winning bid becomes an offer rather than the selling price in this auction type. The winning offer is subject to the seller’s acceptance or rejection. This is particularly prevalent when the seller isn’t distressed, such as with an estate or a bank, so short-term investors may be turned off. These auctions are frequently held online.
Long-term investors, on the other hand, may find a reserve auction to be a fantastic long-term investment. At a reserve auction, though, fix and flippers may still find chances.
The Different Types of Sales You’ll Find at an Auction
At auctions, there are several sorts of sales, and it’s crucial to investigate each type of sale before placing a bid or making an offer. You should also find out if you will be able to see the inside of the property prior to the sale and if you will be purchasing the property subject to any liens.
The following are examples of sales:
- Foreclosure: is a legal procedure in which a property owner who has fallen behind on their payments loses their ownership of the property. If a house does not sell in a short sale and goes to a foreclosure auction, it is termed “foreclosed.” 31.6 percent of foreclosed homes were up for auction as of December 2017.
- Nondistressed REOs: are a kind of property that a lender owns. When a foreclosure fails to sell at auction, the lending institution repossesses the property and sells it at its own auction.
- HUD (Housing and Urban Development): HUD auctions off residences that have been foreclosed on by a government agency rather than a private lender. If a borrower fails on a Federal Housing Administration (FHA) loan, the house may be auctioned off by HUD.
- FSBO (for sale by owner): This is a less typical sort of sale than the others, although it does happen. Some sellers do not want to engage a real estate agent and do not want to wait for a typical bid, so they advertise their house as a for sale by owner (FSBO) on an auction platform. The houses are in various states of repair, and the mortgages are typically current.
4. Arrange for financing for your real estate auction
Investors may prequalify for loans with hard money lenders and standard lenders before buying a home at auction. Hard money loans for short-term investors, conforming mortgages for long-term investors, and nonconforming loans for both long and short-term investors are the three most prevalent loans offered at auction.
When it comes to real estate auctions, all-cash financing is favored. This is because real estate auction listings change quickly, and cash offers the most flexibility since it is not subject to loan regulations. Many real estate auction investors, on the other hand, will employ one of the three financing alternatives listed below.
Real Estate Auction Hard Money Loan
Hard money loans are popular among fix-and-flippers, rehabbers, and other short-term investors due to their speedy approval procedure and short loan terms. Fix-and-flip and rehab loans, as well as government-sponsored. Freddie Mac HomeSteps foreclosure loans are examples of hard money loans.
Hard money loans are often utilized to fund residences in need of repairs and upkeep. They have a quick approval process and a short loan period of one to two years. They’re employed at auctions by short-term investors to get rapid financing and compete with all-cash purchasers’ speedy timelines. Hard money loans, on the other hand, often have higher interest rates than regular mortgages.
Contact LendingHome to discover whether you qualify for finance before bidding on a property at a real estate auction. In just a few minutes, you can get a quotation from them online. It provides prime borrowers with competitive rates.
Conforming mortgage
Conforming mortgages may be used to finance investment properties purchased at auction on a long-term basis. Major financial institutions, mortgage providers, and mortgage brokers all provide conforming mortgages. Because they are insured by the FHA, they provide a reduced risk to lenders, resulting in cheaper rates and down payments but tighter conditions.
A home must be close to move-in ready to qualify for a conforming mortgage. They also take over a month to be approved, with a 15- to 30-year repayment period, and interest rates ranging from 4% to 6%. Conforming mortgages are often employed by long-term investors who want to acquire and keep a property for these reasons.
You may go to a typical lending institution and ask for a loan preapproval. The preapproval, which includes the down payment, may then be used to confidently bid with a maximum budget in mind. Lending banks usually lend up to 80% of the entire purchase price, but they do not cover improvements.
Conforming mortgages are also used by certain investors for “cash-out refinancing.” This implies that an investor pays full cash for a home at auction and then looks for another auction opportunity. When a fresh opportunity presents itself, the investor refinances the first property with a conforming mortgage and utilizes the proceeds to bid on the new house, continuing the cycle.
Conforming mortgages include the following:
Mortgage for Auctions that Isn’t Conforming
Real estate speculators also utilize nonconforming mortgages to purchase properties at auctions. They are not required to follow FHA criteria and are not guaranteed by the FHA, therefore the lender assumes additional risk. Higher interest rates are often the result of this.
Before you bid on a house, keep in mind that you’ll need to engage with a lender. Once you’ve decided on a lender and been preapproved for a nonconforming loan, you can start exploring auctions. This preapproval is normally valid for 60 days, allowing you to bid on a property while staying inside the auction timeframe of 30 to 45 days to close.
Nonconforming mortgages differ greatly from one lender to the next, as well as depending on the kind of loan. They may be used to purchase multifamily properties, apartment complexes, commercial properties, and many properties at once, allowing you to participate in multiple auctions. Bridge loans are mostly utilized by long-term investors, although they may also be used by short-term investors to purchase a property fast before permanent funding becomes available.
Nonconforming loans include the following:
- For properties with two to four apartments, a multifamily loan is available.
- For properties with five or more apartments, an apartment loan is available.
- If you need to season the property before refinancing with a long-term loan, a bridge loan might help.
- A commercial loan is one that is used to finance business assets.
- Blanket mortgage: Used to finance several properties with a single loan.
5. Take part in the auction.
The bidding method is the same in both live and online auctions. We spoke with real estate auction experts Brian Davis, Ernie Rafailides, and Sepehr Niakan to learn more about the process. On auction day, they say, you should anticipate the following if you’ve defined your investment requirements, found a listing, obtaining finance, and registered online.
For live auctions, Davis, the co-founder of SparkRental, says that “all bidders must present documented money for the first deposit.” If you win, you may have a bank check written out to yourself, which you can then give to the auctioneer. Before the auction begins, the auctioneer validates each bidder’s finances and registration details.” Prior to attending the auction, you must register online with the auction house and pay a deposit of roughly 5% of the starting bid price.
“Before the sale begins, the auctioneer delivers some short information on the property,” Davis continues. They’ll go through the auction’s stipulations, such as the required down payment and the deadline for the winner to settle.”
The auctioneer then makes an opening bid, and registered bidders may use a numbered paddle (given to them upon registration) or something similar to put a bid.
The auctioneer, as you can see in the video, keeps trying to raise the price until it hits a final bid price. After that, the auctioneer allows participants a few moments to consider the price before handing the home to the highest bidder.
Rafailides of Bayview Management offers the following advice to new participants:
“Stand where you can watch everything going on. You’ll want to know who’s putting in a bid. It’s possible that the same participants may bid in several auctions. You also don’t want to hasten the bidding process. Let’s see how things shake out. Finally, you should have a price in mind and be willing to walk away if necessary.”
“Auctions often offer bidders access to the property within an hour or two following the sale,” Davis adds. Buyers don’t have much time to assess the condition of the property and settle on a maximum price. If you don’t have a history in contracting or home repair, bring someone with you who does since you’ll need to create an on-the-spot cost estimate.” This means you should always come early to an auction, check-in with the auctioneer, and tour the property as quickly as possible.
The virtual auction procedure is quite similar. Virtual auctions, according to Niakan of CondoBlackBook, are “exactly like any other bidding procedure.” During the online registration process, all participants are asked to pay a 5% deposit. Each bid in a real-time auction resets the countdown clock by a few minutes, allowing time for the next offer until the bidding ceases.”
“You are only permitted to bid up to the point when your deposit exceeds 5% of the entire bid sum, which restricts your budget,” Sepehr continues for virtual auctions. You should make an online deposit equivalent to 5% of your maximum budget. Furthermore, virtual auction companies don’t care whether you have the remaining 95% since if you don’t, they just retain your 5% deposit and relist the home, so be cautious about how high you bid.”
Finally, Davis sums it up well when he adds, “Most first-time buyers want to have a feel for an auction before they begin bidding.” It’s possible that you’d want to take part in your first virtual or live auction without actually bidding.
6. Acquire the property and win the auction
Your prize may be a new investment property if you performed everything well and followed your guidelines. If that’s the case, there’s a precise protocol for both virtual and live auctions that makes the transaction go smoothly. In general, you pay the winning bid sum and then deal with a title firm to transfer ownership.
The following is a general outline of how an in-person auction works:
- At auction, place the highest offer for the residence.
- Pay the deposit within the specified time range, which is generally 24 hours.
- If you’re going to use finance, get a loan on the property. A preapproval will already be in place.
- Use a title firm to close on the property, which is similar to purchasing a regular home.
In the case of live auctions, Davis says that the auction winner must pay a total deposit of between 5% and 10% within the first 24 hours. “The buyer typically has 30 to 45 days to complete payment and transfer ownership after that.” The deposit is normally lost if the buyer fails to pay within this period. Most auctioneers need a certain title firm to handle the transfer of title, and you’ll be given that information after you’ve won.”
The winning bidder gets the certificate of title and the keys when the title is legally transferred, and he or she becomes the legal owner of the property. “A gavel fee is normally granted to the auctioneer,” Rafailides says when it comes to winning a live auction. You will be liable for all settlement charges and transaction fees as part of the final price as the successful bidder, often up to 10% of the winning offer.”
“Most crucially, from the last gavel until when you complete the entire amount, certain auction houses apply interest on the money outstanding,” Rafailides continues. So, settling quickly not only expedites your home ownership, but it also saves you money.”
The winning procedure for virtual auctions, according to Niakan, is a bit different. Bidders who place the highest bid must pay the whole sum within 24 hours. Soon after, you’ll get a certificate of sale, and you’ll have 30 days to transfer the title and take possession of the property. The title transfer is facilitated by the online auction company. You do not, however, get a free and clear title. Except for the initial mortgage, if any, you inherit everything on the title.”
Below, we go through things to look out for in terms of title, liens, condition, and redemption rights.
Other Things to Consider
Sepehr makes an excellent argument. “Winning bidders are liable for any liens, condition problems, encumbrances, or other comparable difficulties,” he adds.
When trying to purchase a property at auction, keep the following points in mind:
- The title to a home is proof of ownership. Is the property you’re interested in having a clear title? A clean title is one that demonstrates a clear line of ownership with no legal issues. A title search may provide answers to all of these questions. According to Sepehr, you may utilize a “title or escrow business to assist with title searches.” You may also get title information by calling your local register of deeds.
- When creditors attempt to recover missed payments, they put a lien on a home. If a lien exists on a house sold at auction, the buyer of the residence may be liable for the debt. A title or escrow business, similar to a title search, may assist you in identifying any liens. You may also check the county clerk’s online records or go to the office of the county clerk in person.
- Have you completed a drive-by or walk-around of the property as part of your due diligence? The appropriateness of a home is determined, among other things, by its condition. A rehabber or fix-and-flipper will choose a property in bad condition, but a buy-and-hold investor would prefer a house in excellent shape. Keep in mind that you may not be allowed to tour the property until a few hours before the auction begins. Do a drive-by inspection if possible before deciding whether or not to participate in the auction.
- Right of redemption: Some states provide a right of redemption to the original property owner. If the former owner pays the winning bid price plus interest, he or she gets a certain period of time to maintain the residence. The winning bidder gets paid immediately, preventing the home from being sold.
Mill Creek Home Buyers’ president, Brady Hanna, advises against purchasing a home without seeing it first because:
“It may have mold, or it might need to be completely gutted, or it might be in worse shape than your budget permits.” If you haven’t viewed the property, don’t purchase it, and avoid being caught up in the whirlwind of auction bidding.”
Conclusion
Buying properties at auction is a unique approach to investing in real estate with several advantages. Short-term and long-term investors both might profit from purchasing a home at auction. You’ll be in an excellent position to grab up a terrific, discounted home if you follow the five steps outlined in this article for purchasing a house at auction.
