How to Finance a Property at Auction
Buying real estate at an auction can be a very enticing method for those who want to own a home but can't afford existing market prices. Be aware that there are many risks when you buy properties through tax lien, probate or foreclosure auctions. Before you consider buying a property at auction, you should do a visual inspection of the property (usually you can only do an external inspection), complete a title search at the county records department and expect to have considerable renovations needed once you take ownership. Financing auction properties is very tricky.
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Instructions
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Contact the agency conducting the auction. This may be a state agency running a tax lien auction or a private auction company. Ask them what the requirements are for payments on properties. Most auctions require a deposit of $1,000 to $5,000 to be able to bid. Once you win a property, you must pay a percentage of the final bid price (often 10 to 20%) that day or forfeit the property and your deposit. From there you will have a designated number of days to complete the transaction or lose the property and your money. This may be 7 to 45 days, depending on the auction.
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Estimate the fair market value of the property. Use online real estate tools such as those found at Realtor.com to find current prices of similar properties in the area.
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Determine a fair auction price you are willing to pay for the property by reducing the fair market value by 40 to 60% or more. You are bidding on a property that most likely needs a lot of work. Never pay fair market value.
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Set your maximum bid price.
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Obtain private financing for your bid price. This may be borrowing money from a family member or taking an equity line out on another property you may own. Don't rely on a preapproved mortgage amount. This may not close in time for you to complete the auction requirements.
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Provide the auction company with the required deposit when you register. Secure enough liquid capital to meet the percentage you will need to satisfy on the day of the auction if you win. For example, assume your maximum bid on the property is $50,000. The auction requires $1,000 deposit and 10% paid on the day of auction. This means you will need an additional $4,000 on the day of the auction to clear your winning bid.
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Pay the auction settlement requirements with the assets you previously acquired.
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Obtain the title and immediately have the home appraised. Apply for a home loan or equity line based on the appraised market value. Repay the private financier with the proceeds. Use excess funds to repair or renovate the home.
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Tips & Warnings
Failure to pay the remainder of the auction price can result in losing the property and your deposit.
References
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