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Should you Buy a Rental Property at Auction?

An auction gavel propped up in front of a replica of a house. For real estate investors, there are both pros and cons to buying a rental property at auction. While auctions can offer new ways to acquire investment properties and increase your chances of finding a great bargain, buying at auction can be far riskier than buying properties in other ways.

With limited time and information about the properties for sale, the chances of making a costly mistake are high. There are many ways to mitigate that risk, but you should learn as much as possible about residential property auctions before deciding whether buying your next investment property this way is right for you.

Why might a residential property end up in an auction?

Residential properties may be auctioned for various reasons, such as unpaid property taxes leading to tax lien auctions or homeowners losing their homes due to mortgage or association fee defaults.

When a homeowner defaults on their mortgage and the lender cannot reach an acceptable arrangement with them, the property typically ends up subject to foreclosure. The lender reclaims possession of the property, and the property is often sold off at auction. These foreclosure auctions are usually overseen by trustees who work for the bank or lender that holds the mortgage loan.

Why is buying real estate at auction risky?

Buying these types of properties is risky because the full details of their condition are often unknown. Sometimes, the bank or lender may not even allow you to have a professional inspection done on the property before bidding or even to look around the property yourself. Previous owners often neglect routine maintenance and significant repairs due to financial issues. In some cases, they may intentionally damage the property, removing items of value like appliances, lightbulbs, and fixtures.

If the property has been vacant for some time, it may also have been vandalized or had squatters living in it. Without a way to legally get inside the property to assess its condition, buying a property at auction will always be a risk. You can talk to neighbors and real estate agents and search local records for information, which may help.

Beyond the house’s physical condition, when dealing with foreclosures, there is a high chance that the property has liens against it or other encumbrances that would need to be paid off before you could purchase it. If you are not prepared to pay these costs and make significant repairs to the property, buying at auction may not be your best option.

What is the process of bidding on real estate?

The process of bidding in an auction is also something that you need to understand before making an attempt to buy a property this way. To bid in an auction, you typically must register in advance and pay a refundable deposit of 5% to 10% of the property’s expected selling price. Auctions can be held in person or online.

Either way, once the bidding starts, you’ll need to understand how real estate auctions typically work. Sometimes, the lender is not required to accept your offer, even if you are the highest bidder. The starting price is often the amount owed to the bank or lender; in other cases, the starting price may be significantly lower to increase the auction’s chances of success. The auctioneer may also set a hidden reserve price on the property, which means that if the bidding does not meet or exceed that amount, the property will not be sold, regardless of who wins.

Winning bidders are generally required to pay in full immediately after the auction. Accepted payment methods typically include cash, money orders, or cashier’s checks. Financing is sometimes allowed, but prequalification is required. Buyers should also budget for auction fees and other associated costs.

How are real estate auctions finalized?

Winning an auction marks the beginning of the acquisition process. Buyers must resolve outstanding liens, finalize escrow arrangements, and complete closing procedures before taking ownership of the property. Given the immediate payment requirements and potential for unforeseen expenses, auction purchases are best suited for investors with substantial financial resources or pre-approved financing. Despite the risks, auctions offer opportunities for investors to acquire properties at below-market prices. With careful planning and a willingness to navigate the complexities, buying at auction can be a rewarding investment strategy.

 

At Real Property Management Honolulu, we help investors evaluate auction opportunities and make informed decisions. If you’re considering buying your next rental property at auction, let us assist you with tools, resources, and expert advice tailored to Kaneohe and nearby areas. For more information, contact us online or at 808-445-9500.

 

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