The real estate auction process has proven, time and time again, that there are still great deals to be had, even with appreciation rates reaching historical highs. At the very least, distressed properties sold at auction represent a great opportunity for savvy investors to acquire their next deal at a great price. Nonetheless, real estate auctions aren’t without their own caveats: they don’t follow the same rules as a traditional sale. In fact, there are some things you should know before you attempt to participate in your first real estate auction, not the least of which are included below.
What Is A Real Estate Auction?
In their simplest form, real estate auctions are nothing more than an attempt for loan originators to recoup the impending losses from defaulting borrowers; the sale should offset the years of missed mortgage payments they were promised when the mortgage was originally signed off on. More specifically, however, real estate auctions are simply one rung on the foreclosure ladder; a single step in the foreclosure process.
When a homeowner is unable to pay off their principal and interest in full each month, they will receive a notice of default. The notice serves as a warning and suggests the foreclosure process will be initiated in the event payments aren’t made current. The notice is intended to give homeowners a chance to catch up on their payments. However, if they are unable to do as requested, it’s within the rights the loan originator (as per the mortgage contract) to seize the asset from the homeowner.
It is worth noting, however, that banks and lenders aren’t in the business of holding on to non-performing assets (homes that aren’t returning capital in the form of mortgage payments). Homes repossessed by the banks are actually costing them money, which is where real estate auctions come in. You see, instead of having the repossessed assets serve as a drain on their bottomline, banks will attempt to sell the homes at auction. That way, they an at least recoup some of the money they stand to lose from not collecting mortgage payments.
Of course, knowing what a real estate auction is and knowing how to participate in one are two different things. If you are interested in buying a house at auction, you should be prepared for what’s in store.
[ Want help finding great investment deals in your area? Use these 14 FREE fill-in-the-blank marketing pieces ]
Preparing For The Real Estate Auction Process
Here are some of the most important things you can do to prepare for the real estate auction process:
- Familiarize Yourself With The Process: Real estate auctions can offer a wide variety of deals to those willing to navigate the process, but I digress. The real estate auction process can be confusing and intimidated to anyone that’s never done it before. It is in your best interest to brush up on the process as a whole. Familiarize yourself with how each auction works. Gain a familiarity with how things are carried out and what will be expected of you before you even attend a single auction. Do not (I repeat do not) attempt to bid on a home at auction without knowing what you are getting into.
- Recognize Your Own Parameters: The reasoning behind buying a home at auction is no different from a traditional sale; you need to buy a house at a good price and turn it for a profit. As a result, there are always going to be parameters you need to work within. Most importantly, you need to know which type of house you are looking for, and how much you are willing to spend on it. Have the logistics of your impending deal fleshed out before you even set foot on the site of the auction, and have an idea of exactly what you are looking for. What’s your timeline, from acquisition to sale? How are you going to finance the bid? How much are you willing to spend? Is it a home you can actually work with? You need to answer all of these questions, and many more just like them, before you even think about bidding on a property.
- Find An Auction That Fits Your Needs: Not all auctions are created equal. More importantly, not every auction is going to have a house you can work with. That’s why you need to identify an auction that’s actually worth your time. Conduct the appropriate research before you actually visit an auction, and make sure it has what you are looking for. Most auctions will post the homes they intend to auction off, so take diligent notes. You can get all the information you need on nearby auctions from auction sites, industry professionals, local courthouses and real estate classified ads.
- Line Up Your Financing: This is perhaps one of the most important steps in preparing for a real estate auction, as you will most likely be expected to pay on site. “All-cash is the preferred type of financing when it comes to real estate auctions. This is because listings at real estate auctions move fast, and cash, since it isn’t subject to lender requirements, provides maximum flexibility,” says a FitSmallBusiness article. Cashiers checks in incremental amounts work best, as you won’t know how much you are going to spend until the bidding is over.
- Have At It: Identify the home you intend to buy, and — more importantly — confirm how much you are willing to spend. What’s your maximum allowable offer? With that in mind, proceed to bid on the home at auction. It should go without saying, but don’t get caught up in the process and bid more than you originally intended — check your emotion at the door.
- Seal The Deal: In the event you place the winning bid, you will be expected to pay the specified amount with a predetermined time-frame. More often than not, you’ll have to pay that day, but it’s not uncommon for auctions to accept payments within 24 hours. Once you have paid, hire a title company and close on the property, much in the same way you would with a traditional sale.
Bidding At A Real Estate Auction
How you intend to bid at a real estate auction will depend solely on the type of auction you attend. There are, in fact, three different types of real estate auctions: Absolute auctions, minimum bid auctions and reserve auctions. How you bid will depend on the type of auction you enter. Generally speaking, however, an auctioneer will call for an opening bid at the same level or higher than the price already predetermined for the home. Most homes being sold at auction, for that matter, will come complete with a starting price. Moving forward, the auctioneer will control the flow of the bidding. At this point, you will continue to bid when you see fit.
Mistakes To Avoid At A Foreclosed Real Estate Auction
The average real estate foreclosure auction awards savvy investors with great opportunities. However, that’s not to say things can’t go wrong. There are, in fact, common mistakes you will want to make sure you don’t commit. Thankfully, it’s possible to learn from those that have come before us. Here are some of the most common mistakes you will want to avoid making at your own real estate auction:
- Letting Your Emotions Get The Best Of You: Be sure to check your emotions at the door. Every bid you make should be made with the numbers in mind. That said, don’t go over your maximum allowable offer simply because another bidder is frustrating you. There’s no faster way to turn a profitable deal into a money pit.
- Pinching Pennies When You Shouldn’t: That’s not to say you should be cheap, but you shouldn’t be afraid to spend money on something that will ultimately make you money in the long run. Of course, you will want to buy the property for the lowest price possible, but don’t stop bidding if there are still attractive profit margins on the table.
- Exercising Timid Bidding Practices: Real estate auctions are no place for the timid. Winning an auction has as much to do with exuding confidence as it does with controlling the bidding. The second you show weakness, the easier you make it for the competition.
Every investor could stand to benefit from learning more about the real estate auction process. If for nothing else, the more you know about bidding on properties with attractive profit margins, the better off your business will be.
- The real estate auction process is something every real estate investor should become acquainted with.
- Only those that can navigate the real estate auction process flawlessly stand to benefit from their offerings.
- Approached correctly, auctions can offer investors some of today’s best deals.