As a first-time investor, auction properties may seem like a quick and easy strategy to build a real estate portfolio. Seasoned investors present acquiring properties through auctions as an efficient way to take advantage of below-market prices, ensuring profitability whether you plan to fix-and-flip or buy-and-hold. These investors suggest that undertaking renovations on the property will unlock its true value as a short-term investment or as a long-term income-generating asset. In this blog, we will attempt to break down the differences between the processes associated with foreclosure properties at auction and traditional retail homes.
Find Foreclosures on Auction.com
Auction Properties vs. Traditional Listings
Buying at auction is very different from making a traditional home purchase. Typically, traditional listings are move-in ready. Other possible features of traditional listings are the following:
- Traditional listings are clean and prepared for top-to-bottom inspections.
- Inspections may be scheduled at the buyer’s convenience.
- Properties may be professionally staged as part of marketing efforts.
- The property comes with a clean title that is unencumbered by any liens.
- Physical condition of the house meets the banks’ standards for mortgageable and insurable properties.
When dealing with auction properties, consider the following:
- Foreclosure auction homes may not be available for inspection prior to the transfer of possession of the property as they are often occupied. The bidder cannot enter until they have won the property and evicted the previous resident/tenant.
- A foreclosure may involve necessary repairs and renovations, and the price typically reflects the condition of the property.
- Seller may impose a short closing period from the time the bid is accepted.
- Title to property may not be ready to convey. There may be liens on the property which can further cloud the title and block a potential sale.
The decision-making process involved in acquiring an auction property is different from the process of choosing from traditional listings. Acquiring auction real estate should be treated as a business decision, focusing on hard facts and verifiable data when comparing auction listings. On the other hand, emotional factors often drive buying decisions when the listings are move-in ready and staged to appeal to buyers. Since traditional buyers choose based on their emotional reaction to the property, sellers tend to play up the visual, tactile, and olfactory appeal of the property. Auction listings may be distressed properties, so buyers will have to do some research and due diligence to determine the potential of the property and to define the parameters at which acquisition would be a profitable venture.
Types of Auction.com Listings
A new investor should take the time to understand the types of auction listings. Pricing, physical condition, and title status may vary depending on the type of listing.
Foreclosures
When homeowners default on their mortgage payments, their property becomes subject to foreclosure by the lender. Based on state-approved procedures for foreclosure filings, the property will be placed up for sale at a public auction.
Bank-owned Auction Properties
A foreclosed property becomes a bank-owned property after it fails to sell to a third party at auction and reverts to the bank. Bank-owned or Real Estate Owned (REO) properties would typically have been cleaned up, and some minor repairs may have been completed. These properties are usually vacant, and buyer inspections may be arranged through assigned agents. The bank may have cleared the title of secondary liens, mechanics’ lien and other legal restrictions. Some REOs qualify for traditional financing.
Pre-commitment Preparations
Prepare an acquisition budget. Determine how much you can invest to buy the property. Remember that foreclosure houses and most REOs on Auction.com will require cash. Some REOs may qualify for traditional financing; be sure to check the Property Details Page to ensure you have the correct type of funds. Additionally, you will also need a strategy to determine your offer price and the upper limit of your bid price to make sure that you recoup your expenses whether you plan to fix-and-flip or buy-and-hold.
Define your rehab budget. When auction listings do not provide an opportunity to access the interior of the house for pre-bid inspections, it may be difficult but not impossible to create a preliminary renovation budget. You can make some determination of the condition of the house by researching:
- age of the fixtures and home features, including heating, ventilation and air conditioning systems
- date of roof repair or installation
- any renovations and upgrades for which a permit was pulled. If possible, drive by the property to take a look at the exterior. The condition of the exterior of the house will reflect pride of ownership, and when the exterior is in good shape, it is reasonable to expect that the interior may be well-maintained also.
Due diligence investigation. The auction listing will provide information that you can use to conduct your due diligence research prior to bidding on an auction property from Auction.com. You should be able to find comparable for-sale or recently sold properties. We recommend you invest in a full title search to identify any deficiencies of the title such as liens and presence of co-owners for the properties you intend to bid on. You should also look up zoning restrictions for the area to make sure that your investment property can be used as a short or long-term rental.
When You’re Ready to Buy
Auction.com is the nation’s top online marketplace for real estate auctions with thousands of bank-owned and foreclosure listings in various states. Here are a few tips to bear in mind as you browse the listings:
Buyer’s Premium
Bank-owned real estate may require a buyer’s premium from the winning bidder. This is a fee that is tacked on to the winning bid price, and it is usually equivalent to 5 percent of the final winning bid or $2,500, whichever amount happens to be greater.
Subject to Acceptance
This clause means that the seller has retained the right to approve or confirm the sale.
Subject to Seller’s Confirmation
When you see this condition on an auction listing, it means that the seller will confirm acceptance or rejection of the bid within a given time frame. Since it is not an absolute auction, the highest bidder will still have to wait for seller’s approval before proceeding to closing.
If you are a new investor, Auction.com is the best place to start browsing the listings of bank-owned and foreclosure listings in your target area and we can help you develop the skills needed to identify properties that meet your investment goals. Explore our listings here.
Also see our multi-video series on auction education here.
