This is the second article in a two part series about what I think are two really good opportunities right now to get involved in real estate investing. In the first article I talked about why I think that this is a real good time to get started in tax lien investing, and in this article I want to discus what I think is another good opportunity right now in real estate – buying property at an auction. If you missed Part I in this series you can read it at http://taxlienconsulting.blogspot.com/2008/11/now-is-time-to-act-part-i.html
If you have more cash available and can qualify for a mortgage, another great opportunity in today’s market is purchasing property at real estate auctions. In some states it’s common for homes to be sold at auction instead of being listed with a real estate agent. Typically this is done for estate sales, when the property has to be sold in order to pay off debts for an estate and distribute what is left to the heirs. Many times the heirs do not want to wait out the process of listing the property with a realtor, or they may have already tried that and were unable to sell the property and now the estate has to be closed, so they hire an auction company to sell the property to the highest bidder.
In good times when the real estate market is strong, auction prices can be quite high. But in times when the real estate market is weak and loans are harder to get, there are not as many bidders at these auctions. Many investors find themselves holding too many properties and not enough cash. It’s also harder for them to refinance and take cash out of the properties that they own for the purpose of investing. If you have the cash you can get some great buys. It’s just a matter of being at the right place at the right time, and being prepared.
Just a week ago we were able to purchase a property at a real estate auction for quite a bit less than it’s appraised value. We didn’t even expect to buy this property, but we went to the auction prepared to bid. I did my due diligence on this property and had a bank check made out to the auction company in the required amount for the down payment. The auction happened to be on a miserably cold and rainy day. There were quite a few people there for the personal property but when it came time to bid on the real estate, not many were there with the required funds. Since the bidding started at a price that was less than half of what I had determined the house was worth, we went ahead and bid. There was only one other person bidding against us and he stopped bidding well below what we had determined would be good price for the property, where we could make a very nice profit on a lease option. We wound up purchasing the property for $70,000 less than what we had determined as market price.
The upside of buying property this way is that you can get a great deal, the downside is that you do not get to control the deal at all. You purchase the house “as is” and cannot negotiate anything that might need to be fixed. There is no buyer’s disclosure letting you know about any problems that may be there. You need to do a thorough inspection of the property before you bid. But many times these homes are well taken care off and the auctioneers do provide times that you can inspect the property before the sale, usually a few days before the auction.
Another thing that may be a problem is that you sign a contract at the auction to purchase the property in a given time frame and there are no contingencies. If you can’t get a loan for the remainder of the purchase price in the time given, you could loose your down payment. One solution to this problem is to line up your financing ahead of time so that you are confident that you’ll be able to close on time.
Another thing that you may want to consider is that there are different types of auctions. Some auctions have a reserve price and some are absolute auctions. In a reserve auction, the property will not be sold unless a reserve (minimum) price is met. I’ve been at a real estate auction where the highest bidder did not get the property because the reserve price was not met. At an absolute auction there is no reserve price and the property is sold to the highest bidder. In my opinion your best chance to get a good deal is at an absolute action. The auction that we went to last week was an absolute auction; hence we were able to sign a contract to purchase the property at a very low price.
If this is something that you think you might want to pursue, start checking your local newspaper for estate auctions. Then go to a few sales and see how they are conducted. Go to sales from different auction companies to see how they are run. Some auction companies are better than others. Make sure that they will guarantee insurable title on the property that they are selling at auction. If you have difficulty finding any real estate auctions in your area, or in your state, and you still want to invest than send an e-mail to me at firstname.lastname@example.org. I believe that even better buys than the one that I got will be coming up in my area and I’m looking for investors to partner with.