Apart from the traditional mode of purchasing a house from a builder or an investor, there is yet another way of purchasing real estate property. This is by buying property at bank auctions.
Buying a property at auction is both exciting and potentially profitable only if know the “Do’s and Don’ts” of it.
Few key things you need to look out for when contemplating purchasing a home at an auction:
1. Purpose of Buying
Are you going to occupy and live in the home yourself? Are you going to rent it out as an income producing property? Are you going to flip in 6-18 months or are you intending on holding for the long term? This will help you determine what you should pay for the property. For example, if you are looking to purchase in a distressed geographic location, then a flip may not be your best bet since no matter what you do to the house, you may not realize the value you create through renovations during the hold period. However, if you think in x years the market in that location will recover and you are planning on holding for that period, then that same investment may make sense.
2. Choose the mode of auction
Banks can auction property either in an offline mode or in the online mode. The traditional offline mode is more popular in India, when banks announce the auction of the property in newspapers. Sometimes, big real estate agents also have this information. In this case, prospective buyers assemble at the auction venue and do the bidding. In the online mode, banks announce the existence of an auction on websites. The recently announced e-Auction by SBI is an example of this. When banks auction the property online, the prospective buyers will need to place online bids for the property. However, this mode is not yet popular in India.
3. Determine value
If you are financing the purchase, then an appraisal will be required and that will provide guidance as to value. However, if you are buying all cash then an appraisal may not be in the equation. In that case, you’ll need to look at comparable sales on your own. If you are using a broker, utilize the broker and have the broker perform a brief survey of property in the geographic region for purposes of determining value.
4. Inspect the Property to determine if there are any red flags
Go out to the property with a contractor and have them look for any major red flags including condition of the roof, structural components, deferred maintenance etc. Have them prepare an informal bid. This can come in handy in case you are already in contract and you need to negotiate a price reduction with the Seller.
5. Funding Factor
Buying a property in an auction requires care to be exercised regarding the costs and property deeds, like any other purchase. However, the auction and purchase process works on tight deadlines, and one needs to have sufficient funds in place at the time of auction. If not, the deposit amount paid will be lost. Therefore one should buy the property in an auction only if the purchase price can be arranged on time. Further, if the price offered at the auction is not very different from the market price, there may not be any substantial benefits in choosing such a property.
If you’re interested buying a property at auction, you should have a decent risk appetite. It is always good to have a comprehensive knowledge about the process and about the properties you are interested in bidding on. Besides, auction properties are worth exploring for savvy, intelligent and motivated individuals who desire for profitable home through an exciting journey.
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