What is a real estate auction?
Auctions have undoubtedly been around for quite some time now. A real estate auction is just like any other, except that it only offers properties. Generally, a property will not be listed for auction just for the sake of it. Auction properties tend to result from defaulted mortgages or outstanding tax liens. Either a homeowner has missed consecutive mortgage payments or has neglected tax payments. In the first situation, a person’s property will be listed for auction if they continue to miss mortgage payments. However, homeowners can prevent this by paying the outstanding balance or renegotiating the terms of the loan agreement. In the latter case, by not paying property or income taxes, homeowners can legally have their property seized from their possession.
What are the different types of real estate auctions?
Once the property has been seized from a homeowner, it will end up in one of the following two auction types:
Foreclosure auctions: Properties end up in foreclosure auctions if the mortgage was defaulted on. In this case, the lender is not allowed to profit from the proceeds of the auction. If a profit still exists after all expenses and liens have been paid, it goes to the previous owner.
Tax lien auctions: Properties end up in tax lien auctions if the previous owner neglected tax payments.
In either case, the bid for property starts at some base amount. Generally, this is equal to the outstanding balance of the mortgage or possibly even lower. Auction participants proceed to bid until a highest bidder is identified.
What happens once the highest bidder is identified?
Depending on the structure of the auction, there are two ways this could play out. Consider the following:
Lender confirmation auction: This auction structure leaves it to the lender’s discretion as to whether or not the highest bidder should be approved.
Absolute auction: This auction structure awards the property to the highest bidder no matter what. So long as the individual has the necessary cash on hand, they will receive the property.
Now that we know how a winner is determined, let’s discuss the pros and cons of real estate auctions.
The advantages of real estate auctions.
There are two primary benefits of turning to real estate auctions to find an investment property.
Potential to find cheaper prices. Often, you can find good deals on properties through this channel. There are more risks associated with auctions so this results in less interest as compared to traditional channels. Knowing this, there will likely be less competition between buyers.
First chance at properties. Auctions present the opportunity to get the first view of select properties. As an investor, it’s hard to complain about being the first to prospect an opportunity.
The disadvantages of real estate auctions.
Despite the benefits offered by real estate auctions, you must also consider its drawbacks.
Large cash requirements. This varies between auction companies, but typically you will be required to provide a down payment in order to secure your bid. This can be as high as the minimum bid amount and is usually made in the form of a cashier’s check.
You may encounter surprises. Surprises can be good sometimes. Other times, not so much. With auctions, you don’t always know what you’re going to find within a property. This is especially a problem since you can’t always inspect the property before bidding on it.
You won’t necessarily win. Depending on the nature of the auction, specifically if it’s a lender confirmation auction, you may not always win despite being the highest bidder.
Additional stresses. Other issues might come up, such as having to evict the previous owner if they still reside in the property.
Remember that it never hurts to explore new sources of investment properties and real estate auctions can present a great opportunity. Today's market is filled with many opportunities for the savvy investor. Our Rich Dad Education trainers will introduce you to proven strategies that can help you launch your career as a successful real estate investor and develop a "Rich Dad Mindset."
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