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Can You Buy Income Property at Real Estate Auctions?

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Real estate auctions may be worthwhile in 2011 and beyond primarily because there is a growing inventory of foreclosure property hitting the market.  Generally, when a foreclosed property goes through the entire process without being sold, it will wind up at a property auction.  As you might imagine, you can often get below-market deals at auctions, as this venue is typically the lender’s last resort to dump the property.  And the below-market deals will probably be higher in number this year because the number of foreclosed homes in general is growing rapidly.

So yes, you can indeed find rental properties at auctions, but be aware that there are some risks inherent in this strategy.  For example, you will not have an opportunity to do a property inspection before you commit to purchasing it.  Yes you can walk the perimeter and peek in the windows but this will only tell you so much.   For all intents and purposes, you will be buying the property as-is, sight unseen.  Therefore, you risk getting stuck with a real lemon that may not even be worth repairing. 

Additionally, you will probably need to pay in cash, because no lender in their right mind would grant you a mortgage on an auction property.  It’s just too risky from the lender’s perspective. 

Also, you can expect fierce competition for the best deals, as you’ll be dealing with professional auction lurkers in many cases.  These people professionally buy fixer uppers at auctions, rehab them, and flip them, and they have deep pockets.   

Finally, if you’re new to auctions there is always a risk of overbidding.  Prices are often so low that new investors get stars in their eyes and wind up inadvertently driving up the price.  One of the main reasons this happens is because new investors underestimate the costs of the repairs needed to rehab the property. 

So, that’s it in a nutshell.  Real estate auctions can be a viable acquisition channel to buy income property but you must proceed with caution.  Understand that there is a learning curve and some inherent risks, so take it easy and try not to bite off more than you can chew.

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