We all have an idea of what auctions are like, usually based on representations in TV shows and movies. There’s usually someone standing at the front of a room, hawking either a priceless painting or a prized pig, and spouting an increasingly nonsensical string of numbers and odd codewords while people in the audience gesture and bid with a series of convoluted signals and movements that make them look like a third-base coach on his eighth cup of coffee. It’s intimidating, but that’s just a comic exaggeration, right?
Well…not really. The truth is that auctions can be difficult and scary for the newcomer, and that is especially true at a foreclosure auction, where a fix-and-flip specialist looking to buy property is investing significantly more than what it costs to buy some walking bacon. These auctions can be great opportunities for a real estate investor looking for property to flip, so understanding how the auctions work is crucial to future success.
Understanding a Foreclosure Auction
A foreclosure auction is simply an auction run by the city or county that allows people to bid on foreclosed properties. A fix-and-flipper should be used to the general idea. Think about distressed properties: properties that, for whatever reason, are for sale at a cost that’s far less than what you think they will eventually be worth. A lot of times this will be because the neighborhood is still up-and-coming, or because the house in disrepair, but with enough work, the property can be worth a lot. These homes can be a great deal.
Frequently the foreclosed house is, from an investor’s point of view, an even better deal. While the foreclosed home might be in a less-desirable or still-developing neighborhood, is is just as likely to be in a good area where the original buyer got in over their head. The prices at the auction can be considerably lower than market prices, but that doesn’t mean obtaining a house at a foreclosure is easy, or even always advisable. Understanding how to work these options can be the difference between getting what you want and not getting it, or worse, getting a property that is overpriced and may ruin your business. Here are five tips that can help you score a deal on your next property.
1. Research is Key
There are a few things you need to know before you go into a foreclosure auction that will help you spend your money correctly.
- Look at property values in the area. Remember that the house you buy may need some work. If a house in the area typically goes for $500,000, and you can get it for $450,000, that might not be a great deal, depending on the work that you’ll need to put into it.
- Most auctions will have plenty of information on the property beforehand. However, it’s also advisable to drive around the areas and narrow down what you are looking for.
- Study the homes in question. If there is someone still living there, there’s a pretty good chance that the majority of the major items – electricity, plumbing, etc. – are still in good working order. This will reduce the amount of money that you have to sink into the house.
- Don’t go to your first auction with the intent to buy. If at all possible, attend an earlier auction so that you can get a feel for the rhythm and cadence of them, so that you don’t make mistakes.
2. Pick Multiple Homes to Buy
It’s ideal to set your eye on a few different properties. Not every auction will have multiple houses in your price range and area, but the chances are good that there will be a few you can swing. Don’t go in with only one property in mind, because that makes it more likely that the pressure of the auction can cause you to overbid. Auctions run on speed, and people make hasty decisions when they think they’re about to miss out on their only opportunity. That’s why a dealer doesn’t let you bring a pen and paper to a blackjack table. Putting all your eggs in one basket and thinking that a single property is make-or-break can cause you to overbid.
3. Bring a Subcontractor With You
Or, at the very least, consult with multiple people on the potential properties. In an auction, once you buy, there’s no going back. You purchase on the spot, and if you bought a house that requires more work than it is worth, you’re up the river. Try to get as many educated opinions as possible beforehand.
4. Pay Attention To Liabilities
There is a chance you might hear the auctioneer say, “The buyer of this property is subject to all liens and encumbrances.” They might even say, “This property is sold subject to…,” which is tricky phrasing. What this means is that if there are any contractor liens or taxes, you, the buyer, are responsible. It is like buying a business and assuming their debt. These liabilities can add a lot to the cost, which is why you really have to pay attention, because they won’t always be listed. Auctions are designed to get people to buy, not to silently peruse.
5. Be Ready To Walk Away
In Michael Mann’s brilliant crime epic, Heat, Robert DeNiro’s character advises a colleague, “Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.” This was a little nihilistic, but it is good advice at an auction. Attachment can mean overbidding. The property might be right, but if the price isn’t, don’t back yourself into a corner. Have an upper limit and stick to it. The average house price in an area isn’t going to go up just because you overbid. It’s a rush, bidding is, but if you can’t walk away, you could put yourself in a hole.
Using Socotra Hard Money Loans At a Foreclosure Auction
There are a couple of ways to use a hard money loan from Socotra Capital to help you at a foreclosure auction. The first is a loan for experienced clients who are ready to buy. Socotra can help you obtain the liquidity needed at an auction.
For others, Socotra can help you put in the work you need to fix-and-flip your property by providing you with a loan based on the property you purchase. Our hard money loans are equity-based, which helps you at an auction – if you have a property you can afford but are worried about having the capital to rehab it, Socotra can help you get what you need. You shouldn’t let the extra 10% it takes to fix it up keep you from buying what you need and getting it on the market. Socotra is here so that you don’t get stalled.
You can even work with us before the auction, so that you aren’t going in blind. At Socotra Capital, we are excited to help people reach their dreams, and will work with you to honestly appraise your possibilities. An auction can be scary, with strange customs and rules. Having someone like Socotra Capital in your corner can help you get to SOLD!
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.