So, you’ve decided to take the plunge into investment real estate. Your next step is to find an investment property. This is sometimes easier said than done. During a seller’s market, investment property selections may be low. If you’re looking for a duplex or another special consideration, finding exactly what you want is challenging.
Good properties typically sell within 30 days of being listed. That means you should be open to different ways to locate that perfect investment property. Real estate auctions are one option that levels the playing field and allows you to compete against anyone wishing to buy the home.
However, you should be aware of a few things before purchasing at a real estate auction — like these six tips.
1. Get to Know Your Local Bank
Homes sold at auction are often foreclosures. The lender wants to make a quick sale and get a portion or most of their investment back. Depending upon the equity in the home, this means you can sometimes find good deals through these auctions.
Take the time to reach out to your local banks and let them know you’re interested in investment properties. They may even let you know when they have foreclosures available and are getting ready to hold an auction.
2. Study Local Real Estate
If you’re not familiar with the local real estate market, it will be impossible to know whether that auction price is a good deal or a bad one. One of the elements both buyers and sellers like about auctions is that you don’t have to negotiate terms and go back and forth. However, this is also a drawback if you aren’t familiar with what that home is worth in the exact condition it’s in.
Take the time to look online at listing sites and even go through open houses to see the listing price and condition of homes in your area.
3. Talk to Contractors
Auctioned homes are almost always sold as-is. That means you need to become familiar with potential problem areas and how much it costs to fix and upgrade the house. For example, if the roof looks as though it’s ready to fall in, how much will it cost to replace the roof, including the decking?
Take the time to talk to local contractors and get general estimates. While you may be able to complete smaller jobs on your own, you’ll need a list of professionals to come alongside you and fix serious issues. Knowing the potential cost also allows you to determine if you can afford that “great deal” at the auction or not.
4. Learn How Auctions Work
Buying a property at auction is entirely different than going through a realtor. There are two models for auctions — they’re either instant, in real-time, or they happen over a few weeks with a minimum bid set or online bids taken. When the bidding gets down to a single bidder willing to pay the top price, the auction closes.
You’ll either need to pay immediately, which means you’ll need financing ahead of time, or you’ll place a five to 10 percent deposit and pay the remainder within 30 to 45 days. Talk to the auctioneer ahead of time to learn the terms of a specific auction, so you’re prepared before you bid.
5. Figure Out After Repair Value
If you need to secure funding from a lender, understand that they typically only lend 65 to 80 percent of a home’s after repair value (ARV). You’ll likely have to make up the rest in the form of cash down. This is where knowing the market and what a home is worth after rehabilitation comes in handy — you’ll be better able to determine if that great deal is one you’re ready to bid on or not.
6. Drive by the Property
Much of the time, the home is foreclosed, and you’ll be unable to get inside to determine the condition of the house. If the person hasn’t paid their mortgage, assume they haven’t had the funds to keep up with maintenance and plan for multiple repairs and cosmetic upgrades.
However, you can take the time to drive by the property and get a general idea of the condition from the outside. Take the time to look at the roof carefully. Does it look like it needs to be replaced? You can also determine a lot from the age of a home. A newer home may not need a new furnace, while an older home likely will. These types of big-ticket item costs add up quickly.
Finding Investment Properties
Auctions are a fantastic way to secure investment property quickly and for a lower price than you might otherwise pay. Although there are some specific challenges with buying from an auction, there are also many benefits. Take the time to get to know your area and the auctioneers, and you’ll pick up enough information to make a wise investment.
Holly Welles is the editor behind The Estate Update and passionate about providing actionable advice for those looking to learn more about the real estate market — especially as millennials begin to tackle the industry. You can find more tips on her Twitter feed @HollyAWelles.