For seasoned and savvy buyers, purchasing a home at auction can be an easy way to a good investment. Buyers beware, though, as these types of properties require a fair amount of know-how and financial freedom. Not all houses for auction hold up their end of the bargain, and one wrong move could take buyers from discount dream to never-ending nightmare.
So how exactly does one venture into this world of bidding wars and quick flips? It takes a bit of preparation, good instincts, and a touch of luck. Follow this simple guide to see if you have what it takes to ride this topsy-turvy real estate wave without getting in over your head.
With the increasing reliance on technology and the internet, auctions are moving more and more online these days. While some still occur in-person at city buildings or conference centers, many auctions can be attended from the comfort of your living room, opening the foreclosure market up to even more potential buyers. Sites like Auction.com and Hubzu are good places to start. Other websites like Hudson & Marshall even make space for realtors to become involved in the process, allowing novice bidders to get their feet wet.
Foreclosures aren’t for everyone. They take a keen eye for structural and cosmetic issues, cash reserves on hand for any necessary repairs and remodels, and a fair amount of confidence in both yourself and the market. Check out Ruoff’s previous article on fixer-uppers to gauge your fit for these more involved purchases. Then, take a few walks through short sales or foreclosures that are on the open market to gain an understanding of the kinds of problems you might encounter in this type of purchase. Finally, ask around. You most likely know at least a couple people who have done this before. Get their feedback on how the process went for them and any helpful tips to help your plans go smoothly.
When it comes to purchasing an auctioned home, your lending options can be limited depending on the condition of the property. Banks are not necessarily lining up to loan money out for potentially poor investments, but there are a few options available. If both the house and your credit score are in good condition, you might qualify for a conventional mortgage, making the whole process a lot easier. If not, an FHA loan is another possibility. This type of loan allows for a smaller down payment and is accessible for buyers with lesser credit scores. Whatever route you take, you will need to secure financing early, as auctions can move quickly. Pre-approval letters (one step beyond a pre-qualification letter) should already be complete along with the maximum down payment you can afford.
Homes sold at auction go fast, skipping many steps that would traditionally be taken when purchasing a new property. For example, home inspections are not guaranteed in the world of auctioned real estate (although they are highly recommended). While the likelihood of the bank or tax agent correcting any discovered issues is a stretch, a home inspection can help you pinpoint a reasonable offer as you take into consideration needed repairs. Many auctioned properties are even sometimes sold sight unseen, increasing the risk-level exponentially. In addition to this, searches for open liens, permitting issues, etc. are usually left in the hands of the purchaser. The due diligence assigned to buyers interested in homes for auction is much higher than a traditional home sale, so get ready to do some digging and save yourself a massive headache down the road.
If you will not be using a realtor, as is common in these kinds of transactions, it is essential you bring in someone to watch your back. This is where a real estate attorney comes in handy. Spend the extra money to hire a professional to review all paperwork (and there will be a lot of paperwork) and make sure everything is on the up and up.
Buying a home at auction can be a great opportunity for buyers looking for a deal. Unfortunately, if you don’t know what you’re doing, that steal of a deal might just end up stealing money right out of your pocket. Help lower your risk by taking precautions on the front-end to limit your frustration when all is said and done.
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