Investors must be on the lookout for good deals, which is why many turn to real estate auctions. Buying on the MLS is undoubtedly conceivable, but it can result in substantially greater competition. Buying a house at auction can be a terrific way to find low-cost offers for fix-and-flip houses or long-term investments, but you must have the cash on hand to make these transactions. This can be difficult if you’re just starting out in this industry. This post will go over how to buy a house at auction, especially if you don’t have the cash right now.
How Does Buying a House at Auction Work?
This is a fantastic way for real estate investors to locate below-market prospects. 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 of time, so if you are interested, you must attend the auction event. Before purchasing, make sure you are familiar with the complete process in your individual location, as the regulations and requirements can differ from county to county.
Can You Buy a House at an Auction Without Having 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 will most likely not have time to obtain a regular mortgage to purchase these houses. Furthermore, they are frequently too damaged for a bank to lend on. But here we have
How to Buy a House at Auction Without Using Cash
#1. Obtain a hard money loan.
Hard money lenders are financial institutions that make loans to persons with bad credit or difficult finances in order for them to purchase 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 of time 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 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%.
Furthermore, these loans have substantially shorter terms. Hard money loans are often only for 6 to 12 months. The lender will then expect you to pay down the entire sum. For these reasons, homebuyers who use hard money loans typically convert into regular mortgages within a few months.
Read Also: How To Save For A House While Renting: A Simplified Guide
To obtain a hard money loan, look for local lenders who understand your local market. This can be accomplished by speaking with qualified real estate agents or attorneys.
Following that, you must furnish the lender with information regarding the property that will serve as collateral for the loan. This entails conducting research on the property before the auction and supplying the lender with information on its market value, any information you can obtain on its condition of repair, current occupancy, and other factors.
You’ll also need to put down a deposit, which is usually around 25%. You must also demonstrate that you have enough cash on hand to make the installments throughout the duration of the loan. You may also need to describe what will happen when the loan’s term expires, such as if you plan to refinance or sell the home.
Once you’ve met the conditions of the hard money lender, you can get the cashier’s check you’ll need to cover the debt following the auction.
#2. Make use of peer-to-peer lending.
Peer-to-peer (P2P) lending systems connect borrowers with those who are willing to lend money. Hard money lenders’ interest rates, down payments, security, and information requirements may be identical. 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, offers a $50,000 maximum loan amount for property purchases.
P2P lenders, on the other hand, can generate funds quickly – in the instance of Lending Club, in as little as 48 hours.
#3. Make use of the equity in your home.
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 percent that rises to 4.7 percent after six months.
Home equity loans can also be retained for far longer periods of time than hard money loans, which means you won’t have to refinance as frequently.
The primary danger with a home equity loan is that your current home serves as collateral for the transaction. If you fail to make the required payments on your home equity loan, your home may be repossessed.
#4. Take out a personal loan
Personal loans are granted based on your credit history, credit score, and ability to repay loans. Personal loans are available from a variety of sources, including online lenders, credit unions, and banks.
Credit unions frequently provide reasonable terms, but you may be required to pay a minimal membership fee as well as live in a specific location or belong to a specific group (such as a member of the armed forces) in order to borrow.
Personal loans from credit unions often have longer terms than hard money loans, ranging from three to five years. The rates are comparable, ranging from 7.5 percent to 18 percent. However, because personal loan limits often peak at $50,000, you may have difficulty borrowing enough cash to buy a house at an auction.
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 buy 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 acquire a foreclosed home from a bank that offers you weeks rather than days to come up with the cash — or both.
The risk with this technique is that if there are delays in closing and funding the loan, you may be forced to come up with all of the cash on short notice, possibly by taking a more expensive or risky route. To commit to buying a home at auction with funds from a traditional mortgage, you must have faith in your lender.
#6. Financing from the vendor
Because the seller of a house 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 via 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.
What Are the Benefits of Buying a House at Auction?
There have been innumerable books produced and real estate workshops conducted that preach the merits of buying houses at auction because you can get a great deal.
Why? Because the lender is aiming to cut their losses during the auction process by recouping the sum owed on the mortgage as well as the fees of foreclosure. Lenders are not interested in enriching the seller at auction. The same is true for towns that have a tax lien. Their goal is to get as near to paying the tax debt and recouping their costs as feasible.
What Are the Drawbacks of buying a House at Auction?
There are various reasons why buying a house at auction is normally in the wheelhouse of a real estate investor and is an unusual way of buying a home to live in yourself. The house is a steal because the buyer is taking a significant risk.
#1. Houses are being sold “as is.”
Homes sold at auction are sold “as is.” That is not uncommon, as many government-owned foreclosures are sold in the same manner. However, it is exceedingly doubtful that you will be able to even enter an auction-sold home, let alone undergo a home inspection. It’s possible that the house is still being occupied by delinquent homeowners, tenants, or squatters. In this scenario, “as-is” is more akin to “unseen.”
You can drive by a house, but trespassing on the property, much alone peeping in the windows or entering the residence, is unlawful and dangerous — even if you saw it on a house-flipping reality TV show. If you are really knowledgeable about home remodeling, you may be able to glean information about the property’s condition from the street or sidewalk. If you aren’t, you won’t know what you’re getting into when you bid on a house.
#2. To make the purchase, you must have cash on hand.
Most auctions have very rigorous payment restrictions, and they nearly always include cashier’s checks or cash. Auctioned properties cannot be financed. There are loans available, which we will explore later, but in order to bid, you must first prequalify by demonstrating that you have the cash to finish the purchase, which is often on the same day as the auction.
As a result, the majority of auctioned-off property buyers are real estate investors. They typically have financial backing from investors or have structured their firms to allow for large cash reserves.
#3. You will forego common safeguards.
Home buyers are legally protected in the vast majority of real estate transactions, lenders are obligated to disclose disclosures, and real estate agents must advise you as they would advise themselves. None of this applies in an auction situation.
In addition to having little or no access to the home you want to buy before bidding, you must do your homework to ensure the title is held free and clear. Of course, the mortgage lender and, most likely, the taxation authorities have liens in place, but you must ensure that there are no other liens, such as a defaulted home equity loan or unpaid homeowners’ association payments. If there are any, you will be responsible for paying them off when you obtain title to the property.
#4. The property may revert to the previous owners if you win at auction.
You could lose the house even if you win the auction. You will walk away empty-handed if the owner is suddenly able to bring their mortgage current, work out a forbearance agreement with the lender, or negotiate a short sale. You won’t know for sure until you get the title in your name, which usually takes about 10 days after the auction ends.
Will A Bank Give You a Loan To Go To An Auction?
You may finance auctioned homes, and there are loans available. But in order to bid, you must first prequalify by demonstrating that you have the cash to finish the purchase, which is often on the same day as the auction.
Buying a house at auction without cash may seem exotic to many real estate investors, but it is possible. It is really possible to acquire offers without a significant down payment if you do your homework and organize things carefully. Before implementing this method, be sure you’ve evaluated the numbers and are prepared to tackle the challenges ahead. Hopefully, this has given you some ideas on how to buy a house at auction without cash.
Frequently Asked Questions
What happens if you cant afford something at an auction?
Unpaid objects are frequently quietly returned to the original consignor, placed in a future auction with a lesser estimated value, or sold privately for a large loss.
How much money should you bring to an auction?
Bring the precise amount of cash or a cashier’s check required for the deposit. Most auctions will need you to put a deposit of $10,000 or 10% of the purchasing price, whichever is bigger. The deposit must be made in certified monies, according to the auctioneer.
What happens if only one bidder at auction?
Your house may still sell, but at best, it will only hit the reserve price. If there is only one bidder, the auctioneer may bid against them to “run them up” to the reserve price.