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Should you Buy a Rental Property at Auction?

An auction gavel propped up in front of a replica of a house.
For real estate investors, purchasing a rental property at auction offers a unique pathway to property acquisition. While auctions can offer new ways to acquire investment properties and increase your chances of finding a great bargain, buying at auction can be far riskier than buying properties in other ways.

With limited time and information about the properties for sale, the chances of making a costly mistake are high. There are many ways to mitigate that risk, but you should learn as much as possible about residential property auctions before deciding whether buying your next investment property this way is right for you.

Why might a residential property end up in an auction?

Residential properties may be auctioned for various reasons, such as unpaid property taxes leading to tax lien auctions or homeowners losing their homes due to mortgage or association fee defaults.

In foreclosure cases, lenders reclaim ownership of the property after the homeowner fails to meet their financial obligations. These properties are then sold at auction to recover the debt. A trustee representing the lender typically manages this process, ensuring compliance with legal requirements.

Why is buying real estate at auction risky?

Buying these types of properties is risky because the full details of their condition are often unknown. Sometimes, the bank or lender may not even allow you to have a professional inspection done on the property before bidding or even to look around the property yourself. Previous owners often neglect routine maintenance and significant repairs due to financial issues. In some cases, they may intentionally damage the property, removing items of value like appliances, lightbulbs, and fixtures.

Vacant properties are particularly susceptible to additional risks, such as vandalism or squatters. Moreover, buyers must be aware of financial encumbrances. Auctioned homes often carry liens or unpaid debts, which transfer to the buyer. Addressing these expenses, along with necessary repairs, can significantly increase the property’s overall cost.

 

To reduce these risks, potential buyers should conduct thorough research. This can include reviewing public records, consulting with local real estate professionals, and gathering insights from neighbors. Such due diligence helps paint a clearer picture of the property’s condition and any potential legal or financial burdens.

What is the process of bidding on real estate?

The process of bidding in an auction is also something that you need to understand before making an attempt to buy a property this way. To bid in an auction, you typically must register in advance and pay a refundable deposit of 5% to 10% of the property’s expected selling price. Auctions can be held in person or online.

Either way, once the bidding starts, you’ll need to understand how real estate auctions typically work. Some auctions set the starting bid at the amount owed on the mortgage, while others use lower starting prices to generate more interest. Additionally, many auctions have a reserve price—a minimum amount that must be met for the property to be sold.

 

Winning an auction often requires immediate payment in full. Buyers typically need cash, a money order, or a cashier’s check. Although some auctions may permit financing, prequalification is usually required beforehand. Additionally, auction fees and other associated costs can apply, further increasing the financial commitment.

How are real estate auctions finalized?

Securing a property at auction is just the beginning. Buyers must still navigate escrow and closing processes before taking ownership. During this time, outstanding liens and other financial obligations must be resolved. The buyer must also finalize all required legal documentation and pay associated fees.

Due to the immediate payment requirement and potential for unforeseen expenses, buying at auction is often best suited for investors with cash reserves or pre-approved financing.

Despite the risks, auctions can present valuable opportunities for investors with the knowledge and resources to navigate the process effectively. Buying properties at auction may allow you to expand your portfolio and acquire high-value investments at a lower cost.

 

At Real Property Management Success, we offer expert guidance for property investors considering auction purchases. Our local expertise, tools, and insights will help you make informed decisions aligned with your investment goals in Taunton and nearby areas. To learn more, contact us online or at 774-840-5140.

 

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