Have you been put off by most auctions’ “cash only” requirement? We know that if you are a new real estate investor, you might not have the cash on hand to buy an auction house. However, not having the cash does not imply the end of your real estate venture. Here, we’ll show you how to buy a house at auction even if you don’t have any cash saved up.
What Are “Cash Only” Auctions?
It is true that many sellers at auctions only take cash offers, giving cash purchasers an advantage. So, what exactly does “cash only” mean? It simply means that after placing the winning bid, you must pay for the investment property immediately or within a specified time frame. As usual, people can bid on a house until the end of the bidding time, at which point the highest bidder gets the property. Typically, the winning bidder must either pay the full price right away or pay a small deposit (5% to 10%), with the remaining balance due within a month or so. Buyers must also fund the costs of the real estate auction.
In fast-moving markets, the “cash only” restriction is prevalent. It is nearly always required when houses undergo extensive remodeling (due to the difficulties of obtaining a mortgage on distressed properties). Another problem is that it’s very hard to get bank financing when you buy a house at auction. This is because auctions usually end within a few hours or a couple of days.
How Does it Work to Buy a House at Auction Without Cash?
This is a great way for real estate investors to uncover below-market deals. The idea is that you’ll be able to buy houses from banks and lenders who are eager to get rid of them. It is fairly uncommon for auctions to take place in a short period, so if you are interested, you must attend the auction event. Before you buy, make sure you are familiar with the complete process in your location, as the regulations and requirements can differ from county to county. We’ll go over this further later.
Can You Buy a House at an Auction Without Cash?
You will almost always require some cash to buy a house at an auction. As previously stated, most county auctions require a deposit immediately upon the decision of the winning offer. Many counties require the successful bidder to pay the balance within hours or days. The majority of auction properties will require payment in cash. You often do not have the time for a regular mortgage on these houses. Furthermore, they are frequently too damaged for a bank to lend to them in the first place.
How to Buy a House At Auction Without Cash
Our real estate auction tips for quick cash are listed below. These will be handy if you do not yet have the necessary financial resources (cash) to buy a house at auction.
#1. Obtain a hard money loan.
Hard money lenders are financial institutions that make loans to people with bad credit or difficult finances for them to buy assets such as real estate. Hard money lenders will make a loan secured by real estate, and if the borrower fails to repay it, the lender can seize the asset, just like a traditional mortgage.
Because hard money lenders charge much higher interest rates over a shorter period to help cover the increased risk of the loan, they are less concerned with factors like credit ratings than conventional lenders.
These lenders thoroughly examine the asset supporting the loan—in this example, the house. The lender will assess the house’s market value and condition to determine whether it is valuable enough to secure the loan (i.e., they believe they can still make a profit if you default).
Because hard money lenders are generally eager to move quickly, a hard money loan will often work for homebuyers at an auction. A hard-money lender may frequently supply you with the funds you need to complete a purchase in days rather than weeks or months.
However, there are several drawbacks to hard money loans. For starters, they often have far higher interest rates than regular mortgages. A hard money loan will most likely have an interest rate of 10% to 15%.
#2. Make use of peer-to-peer lending.
Peer-to-peer (P2P) lending services connect borrowers with those who are willing to lend money. Interest rates, down payments, security requirements, and information requests may be similar to those of hard money lenders. They can, however, vary greatly depending on the individual lender or group of lenders.
One distinction between P2P lenders and hard money lenders is that P2P lenders are unlikely to be able to fund the acquisition of a high-priced home. Lending Club, a well-known P2P marketplace, lets people borrow up to $50,000 to buy property. P2P lenders, on the other hand, can generate funds quickly—in the instance of Lending Club, in as little as 48 hours.
#3. Use your home’s equity
If you currently own a home, you may be able to use the equity in your home to obtain a home equity loan or line of credit. The profits of the home equity loan can then be used to pay for the foreclosure house you won at auction.
Home equity loans can provide significantly more cash than P2P loans and have lower interest rates than hard money lenders. For example, Bank of America offers a home equity loan with an initial starting rate of 2.49% that rises to 4.7% after six months.
Home equity loans can also be retained for far longer periods than hard money loans, which means you won’t have to refinance as frequently. The biggest risk of a home equity loan is that your home will be used as security for the loan. If you fail to make the required payments on your home equity loan, your home may be repossessed.
#4. Take out a personal loan
People get personal loans based on their credit history, credit score, and ability to pay back the loan. Personal loans can be gotten from several places, like banks, credit unions, and online lenders.
Credit unions usually have fair terms, but you may have to pay a small membership fee and live in a certain area or be a member of a certain group (like the military) to be able to borrow.
Personal loans from credit unions often have longer terms than hard money loans, ranging from three to five years. The rates range from 7.5% to 18%. However, because personal loan limits often peak at $50,000, you may have difficulty borrowing enough to cover your full auction purchase.
A personal loan, on the other hand, can provide funds immediately. In most cases, no collateral is required for security.
#5. Obtain a quick mortgage
A standard mortgage may be able to fund a foreclosure purchase in very rare instances. It will depend on whether you can locate a lender who can fund a conventional mortgage much faster than the customary 30 days or so, or whether you buy a foreclosed house from a bank that offers you weeks rather than days to come up with the cash — or both.
The risk of this method is that if there are delays in closing and paying off the loan, you may have to come up with all the money quickly, which could mean using a method that is more expensive or risky. If you want to use a traditional mortgage to buy a home at an auction, you have to trust your lender.
#6. Financing from the vendor
Because the seller of a home placed up for auction is usually a lender, it stands to reason that the lender would finance the purchase.
Lenders, on the other hand, rarely finance the purchase of homes sold at auction. If your other possibilities for raising funds fail, it may be worthwhile to request a loan from the lender who is selling the house in a pinch. However, this is unlikely to be a good primary strategy.
#7. Buy through an auction site
Foreclosed residences are not simply auctioned off on the courthouse steps to the highest bidder. Online auctions, such as Auction.com, also allow you to bid on repossessed houses.
When bidding in an online auction, the procedure is different. However, if you win the auction, you are not required to present the cash.
“If you win a property bid,” Durham says, “you have time to get your finances in shape.” As with a traditional purchase, you may have several weeks to acquire financing. “If you win the bid, it’s like a regular closing,” he says.
Why Are Some Houses Sold At Auction?
Most individuals are aware of how to buy a house, even if they are unaware of the specifics. A “For Sale” sign and a phone number are posted. You go to the house and decide if it’s right for you. If it is, you notify the agent, who develops an offer and informs you of the following steps. The sign will eventually disappear, and the house will be yours.
However, there are various methods of selling homes, including auctions. A house can end up at auction for one of two reasons: it went into foreclosure because the payments weren’t made or the taxes weren’t paid.
Foreclosure
Foreclosed properties are auctioned off. When a borrower doesn’t pay their mortgage for a certain amount of time, the mortgage lender takes their homes. This process begins after several months of missed payments. With rare exceptions, a loan must be at least 120 days late before a servicer can begin the foreclosure process. Servicers must make reasonable efforts to contact borrowers about alternatives to foreclosure in their homes to help them stay in their homes if possible.
Property tax default
Another reason a house ends up at auction is when the owner fails to pay the property taxes. In this instance, the property is seized rather than the lender. If a property has tax liens against it, the situation can be handled in one of two ways. There could be a sale of tax liens, where the liens themselves are put up for bid. The bidder with the highest bid wins the right to collect the liens from the homeowner. If the homeowner fails to make payments, the lien holder may foreclose on the property.
Conclusion
Buying a house at auction without cash may seem exotic to many real estate investors, but it is possible. It is possible to acquire offers without a significant down payment if you do your homework and organize things carefully. Before you use this method, make sure you’ve looked at the numbers and are ready for the challenges that will come. Hopefully, this has provided you with some insight into how to buy a house at an auction without using cash.
Frequently Asked Questions
Are property auctions cash only?
A cash buyer is not required to purchase a property at auction. Instead, you can employ specialist auction finance or a bridging loan. On an auction property, you can even receive a conventional mortgage. However, there are some risks you should be aware of before proceeding.
Can I get a mortgage on an auction property?
You do not have to be a cash buyer to purchase a property at an auction. Instead, you can use auction finance or a bridge loan. You can even receive a conventional mortgage on an auction property. However, there are some concerns to consider before proceeding.
Is it hard to buy a house at auction?
The main risk with buying houses at auction is that you are usually buying them sight unseen. This always opens the door to massive unanticipated expenses.
Can you get a mortgage to buy a house at auction?
Usually, no. Most auctions, particularly those held by counties or cities, require a cash deposit on the spot, with final payment due within a few days of the winning offer. Also, these houses aren’t in good enough shape to be eligible for a standard mortgage.
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