In a distressed market, auctions are great ways to find underpriced properties in need of rehabilitation. Homes selling at an auction have been foreclosed on, and are being sold by the lender at a discount to minimize balance sheet loss. These steep discounts present significant arbitrage opportunities for investors, and competition is often limited because the homes have not been listed on the general market.
There are downsides, however. When dealing with a foreclosure auction, you’ll often run into liens on the property which you would inherit upon purchasing. Make sure when buying houses at auction to flip that your title company has done its research so you know what you’re getting into and that you have a title insurance in case anything comes up. Auctions will also often require you to purchase the property in full, on the spot. If the auction is taking place at the courthouse steps, you’ll need to have large sums of cash or cashiers checks on hand to win a bid and make a purchase. If the auction is online, some other options may be available. Generally speaking, you’ll likely need to buy a property fully and in cash, making financing difficult. You can, however, refinance after the purchase and pull most of your equity out of the property.