Investors need to be on the lookout for great deals, which is why many turn to real estate auctions when looking. Buying properties on the MLS is certainly possible, but this can lead to significantly more competition. Buying a house at auction can be a great source of low priced deals for fix and flip properties or long term investments, but you need to have the cash available to make these purchases. This can make it tough if you’re just starting out in this business. In this article, we’ll talk in depth about how to buy a house at auction, especially if you don’t have the cash available right away.

How Does it Work to Buy a House at Auction?

This in an excellent method for real estate investors to find below market opportunities. The idea is that you’ll be able to purchase properties from banks and lenders who want to get rid of them as fast as possible. It’s not uncommon for the auctions to take place in a short amount of time, so if you’re interested then it’s crucial that you attend the auction event. Be sure to become familiar with the entire process in your specific area before buying, as the rules and requirements can vary from county to county. We’ll talk more about this.

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Are there Different Types of Real Estate Auctions?

There are auctions for land, as well as foreclosed properties. There are two main types of auctions – online and in person. Although many investors prefer to buy houses at foreclosure auctions, that’s not the only opportunity. You can also find great deals on vacant lots or low priced properties that need some repairing work before you put them on the market.

Live auctions are typically scheduled by the county or city and take place at the local courthouse. You’ll find that properties are listed in an auction schedule, and they’re sold at a price that’s determined by the bidders. You typically need to have cash available at the time of the auctiion, usually in the range of 10-20% of the sale price, with the balance due shrotly after the auction. These properties are also typically sold sight unseen. In other words, you will not be given time to inspect the properties. Savvy investors may be able to obtain property lists prior to the auction so you can drive by, however, it’s unlikely you’ll be allowed to see the inside of a property prior the purchase.

Online auctions can be found on sites like eBay, and others. You can also find local counties that offer online bidding through their websites. When it comes to how to buy a house at auction, you can use this to your advantage by becoming familiar with the process of buying real estate from these municipalities.

The duration of the auction is the main difference between live auctions and online auctions. Live auctions may only span a few hours, online auctions typically last for more than one day. You can also typically schedule showings for properties listed via online auction.

Can You Buy a House at Auction Without Cash?

In most cases, you will need at least some cash to purchase a house at auction. As we said earlier, most county auctions require a deposit immediately after the winning bid is decided. Many counties require the balance due within hours or days of the winning bid. Most auction properties will require cash. You typically will not have time for a traditional mortgage to purchase these properties. In addition, they’re often too beat up for a bank to lend on these anyways.

So, How Do You Get the Cash to Buy a Foreclosure Auction House?

There are a few ways to buy a house at auction without your own money.

Our first option is personal loans. It’s possible to acquire a personal loan from a local bank or credit union in just a few hours or days at decent rates. We’ve been able to acquire personal loans in the 8-9% range here in Michigan in as little as a few hours from lenders like USAA. These are often based on your credit score and your collateral. The pros here are very quick transactions and low upfront fees. The biggest downside is that these loans typically require a personal guarantee, so you run the risk of losing more than just your property if things go sideways. They also don’t typically offer interest only payments, so the monthly note can be a bigger burden than with an interest only loan.

Our next option are hard money lenders. Hard money lenders are a good option if you’re trying to scale your business. They are one of the most expensive forms of financing available to real estate investors, but oftentimes, this is well worth it if you have a great deal. We’ve used hard money loans many times over the years. You can expect to pay anywhere from 1-4% in origination fees, and somewhere around 1% per month in interest. Many lenders will also require a minimum term as well – in our experience, 3-6 months of payments. So evem if you’re able to flip the property quickly, you’re on the hook for several months of interest anyways. The pros here are fast cash and bigger loan amounts. Also, they typically only loan against the property, so your personal property is safe. The big con is the cost of these loans.

Our last option for how to buy a house at auction is friends and family loans, a.k.a. private money. The beauty of these loans lie in the flexibility. You can structure payments and terms however you want with your lender. They typically work out cheaper than a hard money loan as well. The biggest downside is that many private money lenders are hesitant to loan to investors without a strong track record.

These are our favorite forms of financing, but there are many others including life insurance policies, HELOCs, credit cards are many others. They all have pros and cons, but no matter which form of financing you choose, be sure you consider the cost, because a bad loan can kill even the best of deals.

The Key to a Profitable Long Term Property Post Auction

Most of the options above are short terms solutions to secure your deal. You will not want to keep these loans for long periods of time due to the high interest rates. So, how can you turn these auction properties into profitable long term deals? The answer lies in the refinance, more commonly known today as the BRRRR method – buy, rehab, rent, refinance and repeat.

In short, you use a form of financing above to secure the property with short term cash. Next, you rehab the property to market or rentable conditions. If you plan to sell the property, obviously you would rehab to a sellable condition, sell the property and just repay your loan. If you planned on keeping the property long term, you can then rent out the newly rehabbed property, use the income to pay off your monthly note, establish positive cash flow and then find traditional bank financing to pay off your higher cost loan and transition into a more favorable long term loan. This helps you secure properties with OOP (other people’s money), thus scaling your business even though you may not have the cash on hand.

One of the biggest keys to this strategy is making sure you’ll have enough equity in the property to be able to repay your higher cost loan with your refinance. Always keep mind, most traditional lenders will only give you 70-80% of the ARV with their loan. In other words, if your property is worth 100k after rehab, expect to get back 70-80k less loan costs on your refinance. If this amount isn’t enough to repay your higher cost loan, than you may have to come out of pocket to cover the difference.

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In Conclusion – How to Buy a House at Auction Without Cash

Buying a house at auction without cash may sound like a foreign concept to many real estate investors, but it can be done. If you do your research and plan things out properly, it is highly possible to secure deals without a large down payment. Just make sure you’ve considered the numbers and are willing to face the challenge ahead before diving into this strategy. Hopefully this gives you some insight into how to buy a house at auction

How to Buy a House at Auction FAQ

Can you get a mortgage to buy a house at auction?

Typically, no. Most auctions, especially via county or city, require a cash deposit on the spot, and final payment within as little as a few days of winning bid. In addition, these properties are also not in good enough shape for a traditional mortgage.

Is it hard to buy a house at auction?

The biggest concern of buying houses at auction is that you’re typically buying sight unseen. This always open the door to huge unexpected expenses. You’ll also either need cash in the bank, or be able to secure a short term loan as we’ve discussed in this article. 

Can first time buyers buy at auction?

Yes! This is a great opportunity for new investors to secure a good deal. Just be sure to consider your financing options.