Buying a home today at a big discount is easy; making it a profitable purchase is a bit more difficult. With short sales, tax sales, foreclosure auctions and bank-owned discount offerings, the options are enticing.
Buying real estate at an auction is one of my favorite strategies, but it does come with some risks. First, you need cash or access to cash. Typically you will be required to pay 10% of the accepted bid at the time of the auction. Usually within 30 days you are required to pay the full amount. In the past, I have used "hard money lenders" who are folks that specialize in short term real estate lending-when the purchase price of the home does not exceed 65% of market value. Expect to pay healthy interest rates, so if you have your own cash, use it.
Another major risk is the condition of an auction property. Usually a home that has reached auction stage has been vacant for some time and the combination of time and vacancy cause a home to deteriorate quickly. In addition, access to an auction property is limited to a few times prior to the auction, so inspection is restricted. Do not bid on a property unless you have thoroughly inspected for termites, mold, structural integrity, HVAC, Plumbing/Sewage and general condition.
When choosing bid properties, stay in a market you are familiar with and are close to home. Remember the old adage about Location, it is more important in today's real estate market than ever. Know what the current market value and renovation cost estimates are in comparison to the starting bid price. Set a ceiling that you are willing to bid, based on your profit potential and level of comfort. Be conservative, because without fail you will underestimate your renovation costs-guaranteed. I've never been right and I've this quite a few times.
Do your research and attend a few auctions for practice and to test your comfort level with actual sales prices. Try not to buy at your first auction, it's tempting, but doesn't always lead to a great decision. You can typically find auction notices in your Sunday Paper or from a range of online sources.
Video of the Day
One of the great advantages to an auction property is clear title at closing. You will own the home free and clear of all mortgages, taxes and utilities. The pictures accompanying this article show a small cottage home I purchased at auction for $25,500. With about $30,000 in renovations, I was able to sell this home for $110,000.
So if you are looking for your first home at a big discount or a profitable investment, consider buying real estate at auction.
Research, research, research! Know your current market values, renovation costs, neighborhood demographics, average days on the market for homes in the area and what homes will be coming to auction.
Attend a few test auctions. Test your research and prepare for the right property at the right auction.
Gather your cash, seek partners or consider your financing options prior to the auction. If you are unable to close in the specified period, you will lose your deposit. So be prepared.
Choose your properties and make your bid. I chose this house because it was in a nice working class neighborhood less than 10 miles from my home, near both public and private schools and did not exceed my pre planned price. Auctions can be great fun. With the glut of properties on the market there may be few bidders on your particular property. Do not exceed your pre planned purchase price, another house will come along.
Start your rehab and marketing your property. I always start marketing while the renovation is ongoing. In this case the property was sold without a realtor and I used Craigslist and open houses to market the property. Buyers were plentiful, but qualifying buyers were harder to come by.
Finish the renovation and prepare for a sale. Make sure you have enough margin to be flexible with buyers. The longer you have to hold a home, the smaller your profit potential.
Enjoy the process and the profits, it can be very rewarding. I enjoy turning a distressed property into a home. This is now the first home for a young couple.