Buying a real estate auction property can be very rewarding if you know what you are doing. There have been numerous home buyers who have purchased a real estate auction property and were rewarded with a large financial gain.
Conversely there have been many cases when the home buyer was the successful bidder and suffered a financial loss. There are many reasons for this which would include: lack of due diligence, underestimating the repairs needed, hidden repairs not accounted for, overestimating the true value of the home after repairs were completed and a change in the market conditions. Who can forget the financial meltdown in 2008?
Bidding on a real estate auction property that is vacant does reduce the financial risk because you will have a chance to view the property and perhaps bring a general contractor with you. It is always best to work with a realtor who can help you establish the “repair” value. The “repair” value is critical to your final bid price.
Purchasing a real estate auction property that is occupied comes with a high level of risk. Not only will you not have access to the house for inspection purposes, but you will need to follow the legal process to physically gain possession if you are the successful bidder.
An occupant of a foreclosed home may be the previous owner, a tenant or even a squatter. Each type of occupant is protected by law and you must consult with an attorney who has experience in this area.
Listed below are some key phrases and words that you will need to understand.
- Bank Owned – these are properties that have successfully transferred back to the lender via a sheriff sale or deed in lieu of foreclosure. A short sale is not a bank owned property.
- Bid Price – the price that you are willing to pay.
- Bid Deposit – many auction houses require a credit card or debit card when placing a bid. The auction house will place a hold on your credit card or debit card. The hold will be released if you are not the successful bidder.
- Bid Increment – is the incremental amount of money needed to outbid the current bid. The increments tend to be high when the starting price is low. The bid increments will decrease as the bid prices become higher.
- Bid Pending Confirmation – there are two ways this may show up. In some cases, the seller will accept an offer prior to the end of an auction period. This normally happens when the seller has an offer that they are satisfied with. Bid Pending Confirmation after an auction has ended means somebody was the highest bidder and met the seller’s minimum sales price. The sales price will not become public information until the auction property has closed in the MLS or the deed is recorded.
- Buyer’s Premium – this is by far the most important term that you will need to know. Every real estate auction property has a Buyer’s Premium attached to it. The Buyer’s Premium is normally 5% of the purchase price or $2,500–whichever is greater. The Buyer’s Premium will be part of the contract of sale and paid on the HUD to the auction house. As an example, if your bid price is $300,000 and you are the successful bidder your final contract price will be $315,000.
- Cashier’s Check – if you are the successful bid you will receive instructions to overnight to the auction house a cashier’s check which will be used as your deposit. You will normally have 48-72 hours to complete this request. The auction house does reserve the right to void your sale and accept the next offer if not received in time.
- Closing – the industry average is 30-60 days to close once the contract is fully signed and received by you. This will vary from property to property and from seller to seller.
- Disclosure Documents – are documents that the seller has in their possession and must share with potential buyers prior to submitting an n-line offer. If there are no disclosures on the property description page then the odds are very good that none are available.
- Due Diligence – before you submit a bid you must do your homework. Due Diligence can include: estimating the true value of the home once its repaired or renovated, your personal estimate to repair the home, does the property have a septic system, is the house supplied by well water, is the property oil heat, are there open permits that need to be closed. Depending on the property there may be other areas that you should investigate. Remember, if you are the successful bidder you will own all problems both known and previously unknown.
- Lease – if the property is tenant occupied and they have a valid lease you will need to honor the tenant’s lease. If the lease appears to be bogus then you should consult with a real estate attorney for advice.
- Limited Liability Company – you may submit a real estate auction bid as a LLC, but it does get tricky if you are not experienced with purchasing a real estate auction property.
- Opening Bid – this is the price that the seller wishes to start the bidding process at. In almost all cases the Opening Bid is well below the Reserve Price. The Reserve Price is the seller’s target price or higher.
- Proof of Funds – you will be requested to supply the auction house with POF if you are the successful bidder. The POF should be no more than 60 days old. Hard Money lending in many cases is not considered cash, but rather private financing. A personal open line of credit that is less than 60 days old will be considered as cash.
- Short Sales – this is not the same as a foreclosure. In a short sale the property owner is the seller and not the mortgage holder. However, the mortgage holder (lender) must approve the sale.
- Warranty Deed – is a deed that guarantees clear title to the buyer of the property. There are multiple types of deeds and you must consult with your attorney after a contract has been signed by you and the seller.
New to the real auction process? Contact Donald Fanelli for a free consultation and let your journey being.