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"Real Estate Auctions: Do Your Homework First"


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You may be able to eventually utilize real estate auctions as a secondary method for acquiring multi-family rental properties, but the "regular" real estate agent / MLS process should be your primary means. In any case, auctions can be risky, so proceed with caution.


AUCTION OVERVIEW


Banks often try to sell foreclosing properties at real estate auctions, and they typically set the starting bid at the amount that is owed (plus auction and other fees). Thus, before the actual auction day you'll want to compare what is owed on the property to market value to get an idea of what you'll need to bid and determine if it's a good deal.

Most real estate auctions are held in a public venue in the county where the property is located, and you can call the trustee or county clerk for the list of upcoming auction dates.

The specific bidding and title-taking process both vary from state to state, so you'll want to do your diligence before diving in. To get the specifics on your state, you can:

  • Talk to the local trustee or county clerk
  • Talk to your real estate agent or property attorney
  • Attend a local auction and observe the process
  • Do research online. A good resource can be found here

If you are the winning bidder, you'll have to pay some amount of money and take ownership. At this point you'll want to get the appropriate documentation from the auctioneer, and verify the next steps to complete the transaction.


STEPS TO UTILIZE REAL ESTATE AUCTIONS


  • Call the county clerk for a list of auctions in your area, and request information on the soon-to-be-auctioned properties.
  • Conduct drive-bys of available properties to assess the condition as well as the neighborhoods.
  • Research properties you're interested in to find out market value, what is owed, and the presence of liens (note: you'll probably be on the hook for any liens you find).
  • Determine your bid range – minimum and maximum – for those properties making the cut.
  • Call the trustee in advance to confirm it's still a "go," as sometimes real estate auctions are postponed without notice.
  • Participate in the real estate auction bidding process, and take ownership if you win a bid.


HOW THE BIDDING WORKS


Again, the bidding procedure varies from state to state. In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier's check to the auction.

In other states, bidders are required to bring a certain percentage (10% is common) of the bid amount to the auction and pay the remainder of the amount within a certain timeframe if they are the highest bidder.


IF YOU WIN A BID


This also depends on your state. In some states, ownership can be transferred immediately or within a few days. In other states, the sale must be confirmed by a court, which may take a month or more.

Some states also have redemption periods, in which the owner can buy the property back from you if they pay the full amount paid at the real estate auction, plus fees. You should avoid spending money on repairs during the redemption period.

Additionally, with foreclosures it is possible that the owners will not leave voluntarily. Just keep in mind that in this case, if the trustee does not file an eviction notice to the current owners, you'll have to do it.


BENEFITS OF AUCTIONS


  • The process is fair to all participants by virtue of the competitive bidding process.
  • Comprehensive info on for-sale properties is usually provided.
  • Long negotiation and contract periods are eliminated.
  • All purchasing and closing dates are known.


DRAWBACKS OF AUCTIONS


  • The good deals are few and far between because most foreclosures do not have much built up equity, and therefore the minimum bid amount is often too high.
  • You may run into professionals with deep pockets.
  • Attending auctions and doing due diligence can be time consuming.
  • You will not be able to conduct a thorough property assessment ...until you already own the property!
  • You may have to deal with evicting occupants or satisfying liens.


BOTTOM LINE


Real estate auctions are risky. Once you've gained several years of investing experience, auctions could be a viable secondary acquisition channel. But if you are relatively new to the game, a much better option is bank owned properties.



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3 Responses to Real Estate Auctions: Do Your Homework First

  1. looseT says:

    Good stuff as usual. I myself have never had any luck with real estate auctions. I’ve attended 4 but i really didn’t know what I was doing. I’m gonna try again following this advice…thanks for sharing!

  2. John Doe says:

    I think real estate auctions are too risky unless you are one of the big boys in the industry. Basically, you have to buy a property for cash, practically sight-unseen, while competing against buyers with much deeper pockets than your own. I just can’t see how this is a viable tactic for someone just starting out.

  3. jonboy says:

    Agree with the other comments…I tried using real estate auctions as an acquisition channel in the late 1990s and even back then it was a complete sharkfest. Way to much competition, and then for the ones with little competition you had to wonder what the heck was wrong with them! No thanks!

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