To be a successful investor, you have to comfortably wear different hats. You’ve got to know how to hire and manage people, and you need to know construction basics. You need to understand the local real estate market. You need to have excellent time and money management skills. Perhaps most importantly, you need to be able to find profitable real estate deals. As a private mortgage lender, we see our borrowers successfully employing many different strategies to do that. This article is Part 1 of our series on finding real deals. Before you begin, go ahead and check out the series Introduction published previously.
One of the popular venues of acquiring an investment property is at auction. As a private mortgage lender, I’ve seen investors finding amazing deals at auction. However, it requires you to be well capitalized and can tie up your deposit funds for a long time. You need to understand how auctions work and what do you need to participate in them. You will also need to know how much to bid and when to walk away.
How the Auctions Work:
A property ends up at an auction for one of two reasons. It’s either been foreclosed because its owners stopped paying on a mortgage or they are severely delinquent on condo fees. Many auctions happen at a local government court house or on property’s premises.
The starting price at the auction might vary, but often it is the balance of the mortgage secured against the property. If no investor bids higher than that, a foreclosing lender takes over the property, oftentimes at a loss. The property becomes “bank-owned or REO”. At that point, the bank is free to do whatever it wants with it. Most frequently, the bank would list the property on the open market – whether in its current condition or after some sprucing up to make it look better.
Alternatively, the auction might spark lively bidding, and the property be sold to the highest bidder. Before leaving the auction, the highest bidder will be required to put down a specified earnest money deposit, usually around 10% of the debt on the property. The highest bidder will not become an official owner of the house until the sale gets ratified by the court and an actual closing takes place. Depending on the county and particular property, the ratification process might take months. As a private mortgage lender, we’ve seen some extreme cases taking up to a year.
What You Need To Participate In an Auction:
The good news is that you don’t need to pre-register to participate in the auction. You can just show up. However you need to know where and when an auction takes place and have three things: (1) time; (2) earnest money; and (3) funds to purchase the property once the sale gets ratified.
You Need to Know Where and When Auctions Take Place:
A handful of auctioneers handle most of the auction work. Check online. For example, one of major auctioneers in Maryland is Alex Cooper. Their website has a full listing of upcoming courthouse auctions so you can start checking out potential properties.
You Need Time Flexibility:
Majority of auctions take place during the week and during regular business hours. The auctioneers don’t make it too convenient. They might hold an auction for two properties you are interested in at 9:00 am and another auction for another property you want to bid on at 11:00 am. On one hand, you have to be ready to spend your entire morning at the auction. On the other hand, you have to be prepared for any auction to be cancelled right before it starts.
If you are the highest bidder, you will be required to put an earnest money deposit. An earnest money deposit varies from property to property and can range from $3,000 to more than $30,000. An earnest money deposit is specified in advance and is required in a cashier’s check. That means that if you are planning to bid on two properties you need to have two certified checks in your pocket – one for each property. You can use any source of funds for your earnest money deposit. However, it’s important to remember that as a private mortgage lender we do not provide financing for them.
Loan Pre-Approval or Proof of Funds:
Let me be very clear: You are not required to bring any letter of pre-approval or proof of funds to the auction. Your earnest money deposit is a guarantee that you are serious about purchasing the property. If for some reason – almost any reason – you are unable to buy the property, you would lose your earnest money. This is why if you are planning to work with a private mortgage lender, it’s crucially important to be pre-approved. Since as a private mortgage lender, our underwriting is heavily focused on collateral, you have to be reasonably sure that you are getting a good deal. This brings us to another key aspect of making money at the real estate auctions: your bidding strategy.
Planning Your Bidding Strategy:
If you won a right to purchase the property, you must purchase it or give up your earnest money deposit. If you later discover that the property has a cracked foundation – too bad, you are still on the hook. That means that you’ve got to do as much analysis as possible before getting to the auction.
The analysis can be tricky. Some auctioneers allow a brief access to the property before the auction, but many just publish the property description such as property type and square footage. You might not know the property’s actual condition. In some respects, buying a property at the auction is like shooting in the dark and hoping for the best. Still, you’ve got to try your best.
At the minimum, do a detailed analysis of the similar properties sold in the immediate neighborhood. Look at the properties that are both distressed and not in the best condition and those that have been rehabbed. If you have time to drive to the property and take a look at it, do it – even if it’s from the outside only. Peek through the windows and try to access the property condition. See if it’s currently occupied or vacant. This can influence how quickly your sale can be ratified by court. Remember, the goal of your analysis is to determine the maximum amount you are willing to bid.
Knowing When to Walk Away:
The most important thing you can do for yourself is to know when to stop bidding and walk away. As a private mortgage lender, I cannot emphasize it enough. You goal is not to overbid the other guy. You are not an art collector bidding on a Picasso at Sotheby’s against another mogul. You shouldn’t get emotionally involved in the process. Yes, it’s possible that you spend a chilly January morning freezing your butt on the court steps and have nothing to show for it at the end. However, it’s much better than to walk away with a property that would later drain your wallet.
One of the great things about buying at auction is that you are bidding on distressed properties. You can walk away with really amazing deals if you are patient and keep showing up at the auctions day after day. Auction buying is all about discipline and sticking with your numbers.
Here is the summary of the pros and cons of buying an investment property at the auction:
New Funding Resources LLC is a premier private mortgage lender that funds promising real estate investment opportunities in Maryland, Washington, DC and Virginia. You can apply on line or call 240.436.2340.