If you’re looking to pay under-market prices for your real estate investments, it's worth looking at property auctions.
Properties are often auctioned to pay off a debt. Perhaps the property owner lost the home to foreclosure or past-due taxes. But they might also be auctioned as a means of driving up the price through a bidding war. So if you’re going to purchase a property through auction, you have to go into the process with your eyes wide open.
Here are five things you should know about before attempting to buy a property at auction.
The Condition of the Property
Properties sold at auction are almost always sold in as-is condition, which means you’re buying the property in its current condition, with all its faults, even if those faults aren’t immediately apparent.
Interestingly, many auctions don’t provide the opportunity to inspect the property or even tour the inside of the property before the auction. If that’s the case in your area, you need to assume the worst. Plan on a complete rehab of the entire property. And make sure you have some cash reserves for potential structural damage just in case.
The Costs of a Rehab
Knowing how much a rehab will cost up front will help you determine how much you’re willing to pay to purchase the property at the auction. If you aren’t able to inspect the property before the auction, you must assume that everything will need to be rehabbed.
Smart tools like PropStream’s Rehab Estimator can help take some of the guesswork out of your rehab calculations. The Rehab Estimator uses local labor and material cost information to make your cost estimate as accurate as possible.
Any and All Liens
Liens are claims against the property by third parties. If the property owner owed money to third parties, these third parties may have placed a lien on the property to prevent the owner from selling or refinancing until the debt was paid. But if the property is sold at auction, the buyer will likely be responsible for satisfying those claims.
You can start your liens research on PropStream using the Property Tax Information Tool to see if tax payments are current and the Distressed Property Finder to find various other involuntary liens (such as mechanic’s liens, IRS liens, or judgment liens). It’s always a good idea to check your local records office to confirm the status of any and all liens.
You will probably not be the only person bidding on a certain property at the auction. Auctions rely on getting people caught up in a bidding war, and this often results in investors blowing their budget.
To make sure you don’t get emotionally involved in a bidding war, it’s important to establish your budget before you attend the auction. Set your price limit and stick to it. There will be other properties that fit your budget.
Your Risk Tolerance
Auctions are inherently riskier than standard acquisitions. While many standard purchases come with a home warranty, there is no such safety net with auctioned properties. If you're willing to accept this risk, you can find some truly spectacular deals. But it’s also entirely possible to lose money on an auction property.
If you’re on the risk-averse side, you may want to stick with auctions that allow full inspections. Or you may want to try short sales instead.
To minimize your risk when purchasing a property at auction, assume the worst of the condition, carefully estimate your rehab costs, research any liens, and be clear on your budget before the auction begins. You may just walk away with a deal you never could have found in the traditional real estate market.