Should I avoid auctions for investment properties?

By From page C2 | February 02, 2013

Q: It’s no secret that many houses are going for a lot less than they were a few years ago, so I keep thinking it’s time to buy some investment properties. I have a friend who has bought a couple of properties at auctions. They didn’t have real estate agents and said everything was fine. On the other hand, I keep reading about people who are buying these houses and get themselves in trouble because the laws are very different when it comes to buying a foreclosure as opposed to buying a house the normal way. Should I stay away from the auctions? Should I contact an agent? How can I find out what to do?

A:  It depends on what you mean by “the normal way.”

Right now, short sales are the “normal way.” They account for a vast majority of the homes on the market.

Complicating this issue for you is the fact that there are relatively few homes currently on the market, or being foreclosed, and there is an armada or investors all competing to purchase them.

For a lone home buyer, the whole process can be extremely competitive.

But for your specific question, let’s start at the beginning.

You need to find out if you are even able to buy a rental property. Go to your local bank and sit down with a loan officer. You should be able to get an idea of whether you should go any further down this road.

Nowadays, investor loans typically require outstanding credit and a big down payment.

I’m being told that if you have good credit and 20 percent to put down on the property, the financing shouldn’t be a problem. But you want to make sure before you do anything else.

You then need to figure out what kind of “auction” you’re talking about. People often confuse the various types.

The most basic is the actual foreclosure auction.

When a house is being foreclosed by the bank, notices are published in the newspaper, and at a specific time and place the house is sold to the highest bidder. The buyer receives a deed from the sheriff.

In a foreclosure auction, the buyer receives nothing from the seller. There are no disclosures, no title report, no right to inspect, nothing. You pay your money and get a sheriff’s deed.

Right now, there are very few foreclosure auctions where anybody even shows up to bid. The reason is simple. The opening bid has to be at least as much as the first mortgage on the property. Since most of the foreclosed homes are upside down, meaning there is more owed than the house is worth, no one wants to make the minimum bid.

As a result, the bank simply takes title to the house.

Most people who say they bought a house at a foreclosure auction were really buying a house that was already foreclosed and is now owned by the bank itself.

Banks used to then hold auctions for the properties they were trying to dump.

These auctions may look, and even sound like foreclosure auctions but they are very different for several reasons.

However, I don’t hear of these bank auctions anymore. Maybe they still happen, but I suspect it must be infrequently.

If you want to buy a house, for investment purposes or to live in, find a Realtor.

You never limit yourself by using a Realtor. Plus, their commission comes out of the sale of the property, so you’re not incurring any added costs.

A Realtor can help you find both short sales and bank owned properties, so you get the whole market available to you.

Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like to have answered in this column you can contact him at [email protected].

Tim Jones


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