Pros And Cons Of Buying Auction Homes

Whats An Auction Property

PropertyGuru Tip

An auction property is a piece of real estate thats owned by a bank and sold at auction.

foreclosed on and been repossessedcould not settle the outstanding payments on the propertyAs the process of purchasing an auction home is not the same as purchasing a home from a private seller

Why Should You Put Rental Property In An Llc

Creating an LLC for your real estate investment business makes adding new owners or transferring the property easy.

To sell the LLC real estate, you can sell the LLC by transferring the membership interest to the new owners. The LLC continues to own the property, while the new members now control it. You dont have to go through a real estate transaction and avoid a break in ownership.

With an LLC, its simple to include more real estate investors as owners. Adding a new member is as simple as amending the operating agreement. Otherwise, youd have to go through the time-consuming process of changing the deed and mortgage documents.

What Are The Two Property Auction Methods In The Uk

There are two ways that exchange and completion can take place at a property auction the traditional method and the modern method.

• If you successfully bid at an auction that uses the traditional method, youll exchange contracts and pay a 10% deposit immediately after the auction finishes. Youll then have 28 days to complete.
• With the modern method, you dont have to exchange contracts straightaway. Instead, you pay a fee to reserve the property, which is non-refundable if you pull out. The cost of this varies, but its normally a percentage of your bid. You then have 56 days to exchange contracts and complete the purchase.

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File Articles Of Organization Or Certificate Of Formation

Once youre ready, head to your Secretary of State or Division of Corporations to form your LLC. In most states, that means filing your Articles of Organization and Certificate of Formation. In this step, youll decide to register as a broker or investor, which determines the business license youll need. After registering your name, its a good idea to claim your domain name so you can reach your customers online.

Not Everyone Can Buy At Auction

Because the auction process is so different to buying through an estate agent, not everyone can buy.

Financing requirements

When you buy through a traditional auction, you have to complete within 4 weeks of winning the auction. This isn’t really enough time to get a conventional mortgage in place:

• Although some mortgage lenders can move that fast, there are no guarantees.
• Penalties are harsh if you miss your completion deadline too – so it isn’t worth the risk.
• Remember that you aren’t guaranteed to get a mortgage either – the lender may discover some issue and refuse to lend.

This means auction buyers usually need to be buying with cash, or have specialist auction finance in place. .

Properties sold through the “modern method of auction” often allow more time to complete 8 weeks is typical. This is usually enough time to get a mortgage, but you still need a plan-B in case your mortgage is refused.

Follow the link below to learn more about financing an auction purchase.

Auctions and house chains don’t mix

Another reason auctions aren’t for everyone is because they don’t really work if you’re in a chain.

As we’ve covered, auctions have set timeframes everyone needs to work towards. If you’re in a housing chain though, you’re simply not in control of your timeframes. You’re relying on your buyer, numerous solicitors, and maybe even other transactions further down the chain.

Can first-time buyers buy at auction?

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Traditional Auction Vs Modern Method Of Auction

A traditional property auction takes place either in a room or online over a specified time period.

Properties are advertised online or in a catalogue ahead of the auction. Prospective buyers will attend in person, or make bids over the phone or online. Nowadays, many auctions take place online and not in person.

Exchange of contracts takes place immediately after the auction ends, and the winning bidder pays a non-refundable 10% deposit, or reservation fee, which is charged on top of the purchase price. This figure can be subject to change, but will never be more than 10% above or below the guide price. The buyer then has just 28 days to complete on the property, meaning these auctions typically appeal to cash buyers who dont need to raise finance.

With the Modern Method of Auction , usually online, buyers are given 56 days to complete the transaction, meaning they have time to finalise a mortgage agreement they will have secured a mortgage in principle met the lenders affordability criteria before bidding. As with traditional property auctions, a non-refundable fee has to be paid to show buyers are committed to the purchase in MMoAs, this is usually about 5% plus VAT.

Read more: A step-by-step guide to buying your first home

Payment Options: Plan Ahead

Buying a property at auction usually requires a lot of cash. Each auction company and county government has its own requirements for payment, but you will probably need cash just to secure your right to bid. Down payment amounts and methods of purchasing often depend on the property and the auction house. More flexible financing options may be available by purchasing a bank-owned property the traditional way.

As for payment, bidders at an auction should bring cash, a money order, or a cashiers check for the sum required by the auction holder. Typically, you will have to pay for the property in full immediately after winning the auction. Occasionally, you may have until the next day to complete payment. Failure to complete the payment may result in forfeiting your deposit and being banned from future auctions. Be prepared to provide proof of funds to show you can complete the purchase. If you are bidding as an entity, such as an LLC, a trust, or a limited partnership instead of as an individual, you may need to show your entity documents.

Also, be sure that you understand the auction fees you will be expected to cover. Homes purchased at auctions many times have costs and fees from auctioneers, banks, attorneys, and other companies required to bring the property to the auction, says Humes. It is not uncommon to find 10% auction fees, bank interest and penalties, attorney fees, 12% sale carrying fees, and property preparation fees that are passed on to the buyer.

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The Stages Of Foreclosure

There are three stages of foreclosure: pre-foreclosure, auction, and post-foreclosure. Buyers can purchase the home during any of those stages however, who you buy the home from changes throughout this process.

If you buy a home that is in the pre-foreclosure period, you will buy the home from the homeowner and they will be able to avoid foreclosure. If you buy the home during the next two stages, then you will purchase it from the bank or mortgage lender.

• If the home is in pre-foreclosure. If the home is still in the ownerâs possession, they may be willing to sell for a lower price in order to secure a short sale, or they may want to get a good price for their home so they can turn a profit. This depends on the sellerâs needs and preferences, as well as the state of the real estate market.
• If the home is in the auction stage. If you buy a home in the auction stage, the bank or lender could let it go for substantially below market value so they can recoup their losses without having to put the home on the market.
• If the home is post-foreclosure. If you make an offer before anyone else does, you may be able to negotiate a good price or other money saving perks, like lower closing costs.

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How To Buy A Short Sale Home

Find out the pros and cons of purchasing a short sale.

Purchasing a short sale home can be a good way to stretch your home purchasing budget. However, it can make the home buying process longer and more complex. This guide covers the basics of buying a short sale home, including details about how a short sale works for the seller, to help you decide if pursuing a short sale is worth the extra time and effort.

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Multiple Listing Service Data

Direct multiple listing service reports are far more valuable to potential buyers than online listings, according to White, because they contain the full data for the listing, including photos and, most important, nonpublic broker comments. Non-public comments are important because they specify critical information impacting sale price and days-on-market, says White. This information can cover property defects, financing options, occupancy, and tenant leases.

The best way to assess an auction property is to work with real estate agents, appraisers, and contractors. These industry representatives understand construction and remodeling costs and can accurately estimate the propertys value and the cost of the work it may need.

While rules vary by location, MLS and county records are often only available to real estate licensees, according to White. In his experience, they are usually happy to help free of charge if you contact them.

White also notes that in-person auctions have been disappearing because even smaller counties have been moving them online. Miami and Palm Beach are two locations where both tax and foreclosure auctions are now fully online.

Keep in mind that foreclosure auctions are often postponed or canceled, even at the last minute. The lender might not have obtained all the paperwork it needs, or the borrower may have worked out a solution to avoid foreclosure.

Cons Of Buying A Foreclosed Home

Whether or not a foreclosed home is a good fit for you will depend a lot on your budget, your willingness to be flexible when it comes to repairs and timeline, and whether or not you actually fall in love with a foreclosed home. Take some time to weigh the pros and cons of buying a foreclosed home so that way if you do find one you want to buy, you know what youâre getting into and how you want to proceed.

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Time Effort & Money Will Feel Wasted

When you buy through an estate agent, you view the property and make your offer. If it’s accepted, all the due diligence starts.

Auctions work the opposite. With auctions, you do all your due diligence before you bid.

So what’s the problem? Well, due diligence is expensive and time consuming:

• You should view the property,
• And have a solicitor review the legal pack for you.

Do your due diligence and your valuation work, and then decide how much you’re willing to bid. That’s how to survive the auction game.

Unfortunately, you aren’t guaranteed to actually win the auction after all that work. This can feel like money down the drain again and again when you aren’t winning.

I think that’s one of the reasons so many buyers decide not to do thorough due diligence before bidding. But this is an awful, awful mistake. I get calls from so many buyers who’ve taken shortcuts with their due diligence, and then walked into a money pit.

Don’t let this be you.

Although due diligence is time consuming and expensive, and it can be tempting to skip, if you want to find success with property auctions you need to get used to it.

Should You Sell Your Property At Auction

Auctions main strengths are:

Auction weaknesses are:

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Stuck With An Unfavorable Offer

References

Pros Of Selling Your Pittsburgh Home By Auction

• In an auction, you start with the reserve or starting price you set. You can hire a real estate agent to do a comparative market analysis and help you determine the reserve price by comparing your home with recently sold properties in your neighborhood.
• The reserve price protects you because it is the minimum price for which the property will be sold.
• Youre in control of the marketing for the auction. You get to decide how to advertise the upcoming auction to the public and the marketing budget to allocate for it.
• In the worst case, if the property doesnt sell at the auction, you can connect directly with buyers who showed interest and continue the negotiations.
• Sometimes, you might even get an early sale where a keen buyer offers you a sum. The buyer suspects there might be too much competition at the auction, so theyre looking to snap up the property before it goes into auction.
• Homes with unique features are most suited for auctions, as they attract more competition among bidders.
• If there are multiple interested buyers, they will likely engage in fierce competition outbidding each other and helping you get a bigger profit.

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Buying At Auction Is Final

There’s nothing worse than agreeing a purchase through an estate agent, spending hundreds of pounds on searches and surveys, and then having the seller pull out of the sale on you several weeks into the process.

• The seller could simply change their mind,
• They might lose their onward purchase and decide to stay put,
• They might accept a higher offer than yours, even if it’s weeks later

With auctions, none of these are a risk. When you place that winning bid and the hammer falls, the sale exchanges. This creates a legally binding contract between yourself and the seller. Neither party can pull out for any reason.

This is why such a tiny fraction of auction sales fall through, compared with around 30-40% of estate agent sales.

It’s also worth noting that although sellers can’t back out after an auction, they’re usually free to withdraw their property before it goes to auction.

You Have To Pay A Deposit

One of the downsides of real estate auctions is that you typically have to pay a deposit upfront. This can range from a few hundred dollars to several thousand, depending on the value of the property. Additionally, if youre the winning bidder, youll be required to pay the balance of the purchase price within 24 hours. This can be a major disadvantage if youre not prepared financially or if you end up being outbid by someone else. In some cases, sellers may be willing to work with buyers who are not able to pay the full amount right away. However, this is usually only the case if the property is not in high demand. Most of the time you have to pay a deposit right away and the rest of the payments within a very short timeframe.

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The Pros And Cons Of Buying An Auction Property

When looking to purchase a new house, its possible you could find your dream home in an auction! If you shy away at the word auction, thats actually completely understandable it sounds, and can be, extremely intimidating.

But understanding the process of purchasing an auction house will help you feel more comfortable with the idea of getting one, and may even encourage you to take action.

This is especially if you enjoy research and the thrill of hunting for good deals!