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Wholesaling Auction Properties

Wholesaling Auction Properties: The (Ultimate) Guide

real estate investing strategies real estate terms wholesale real estate Jul 21, 2022

Real estate wholesaling auction properties can be a cost-effective way to build a real estate investment portfolio. Many of the properties offered for auction are homes facing foreclosure or otherwise distressed. Often, these homes can be purchased below market value.

In this article, you’ll learn how real estate auctions work, where to find auction properties for wholesale deals and how to wholesale real estate auction properties.

                                                                      

What Are Auction Properties?

Auction properties available for residential real estate investing are those offered for sale to the public via a real estate auction. The auction may be held by the homeowner, the government, a financial institution, or more rarely, the home’s builder. Common reasons for auctions are foreclosure and tax lien, though not all auction homes are distressed properties.

A sheriff's sale, also known as a judicial auction, comes about because of a court order, typically due to foreclosure. These auctions are also sometimes held because of tax liens or even lawsuits where a property needs to be sold in order to comply with a judge’s ruling.

In some states, non-judicial trustees hold the foreclosure auction, also known as a trustee sale, rather than the county sheriff’s department.

Lenders auction off the property in the hopes the auction earns enough to satisfy what is still left on the mortgage. If a bank fails to sell the home at auction, it becomes a real estate-owned (REO) property, meaning it remains bank-owned until sold.

REO sale auctions are auctions of bank-owned properties. Not all REO properties go back through auction to sell. Some will be listed on the local MLS or sold via other means.

Besides foreclosures, some homes end up being auctioned by the local government because the owner has fallen severely behind in their annual property taxes. Typically, property tax sale auctions are held on an annual basis.

There are also luxury home auctions. These properties typically aren’t distressed but are sold at auction to avoid the lengthy time on the market that upper-level of luxury properties can face.

Other homeowners choose to sell their homes at auction because they think they will get a higher price than listing them or simply don’t want to go through the process of putting their homes on the market.

                                                                      

Can I Wholesale An Auction House?

wholesaling auction properties auction house

The short answer is yes, you can wholesale houses found at auctions, whether it’s through an in-person auction or you take part in an online auction.

The biggest difference for wholesaling houses between an in-person auction and an online auction is that an in-person auction is almost always going to require you to pay the full purchase price in cash at the end of the auction. Online auctions are more likely to require you to make a bid deposit, followed by an escrow payment if you are the successful bidder. You will then have a period of time, often as short as 10 days, to pay for the purchase in full.

For real estate investors, wholesaling is a particularly appealing investing strategy because of its quick turnaround from purchase to profit compared to flipping houses or rental properties, and it doesn’t require a lot of cash upfront. The wholesaler is able to “assign” their rights to purchase a property to an end buyer before a closing takes place, thereby negating the need for a lot of upfront cash.

While each auction place has its own rules and regulations, in most cases you can expect to have some cash outlay upfront, often 5% to 10% of the expected sales price. If you intend to bid on multiple houses, this can add up quickly.

Once you win an auction, you’ll be required to pay for the property in full with either cash or a cashier’s check either immediately or within a short period of time. If you fail to do so, you can lose your deposit and the property. You could also be banned from future auctions.

Auctions also involve fees, such as attorneys and closing costs, the auction venue fees, and other fees related to the auction process.

A hard money loan or bridge loan can help provide cash upfront so you can still be successful in wholesaling auction properties without a lot of cash outlay.

Another component of wholesaling auction properties is the property isn’t technically yours even if you have the winning bid until you get the title certificate. In some cases, a previous owner may be able to reclaim the property by paying a debt in full or filing a legal objection.

If a property is subject to redemption rights, the title typically doesn’t transfer free and clear until the redemption period has passed.

Auctions offer great properties for wholesaling, as long as you understand the process.


Read Also: Wholesaling Real Estate For Beginners


                                                                      

How To Wholesale Auction Properties: Step By Step

how to go wholesaling auction properties

The steps for wholesaling auction properties differ slightly, depending on whether you purchase the home through an in-person auction or you go through an online auction site. Let’s start with a look at in-person auctions.

Build A List Of Investors

Your first step in wholesaling auction properties—if you are new to wholesaling—is to build a list of investors and cash buyers.

One of the best ways to find investors is by subscribing to the email and direct mail list other wholesalers put out regarding available properties. After about a month, check with your county and find out who bought those properties. You can use a skip tracing service to get contact information for these buyers.

Another good way to connect with cash buyers is by creating an online presence that includes a lead capture form for investors. If you plan to do other types of wholesaling, you can use a similar process for capturing motivated seller leads.

You can also find cash buyers by attending real estate auctions, reaching out to hard money lenders, using social media, joining real estate investment groups, and simply networking and getting the word out that you are going to be wholesaling auction properties.

Get to know what these investors are looking for in an investment property and communicate with them regularly so you can build a reputation as a source for adding to their inventory. Doing so will make it much easier to build a quality buyers list and flip an auction home to an end buyer.

Identify A Hard Money Lender

This step is important unless you have your own cash reserves or other means of transaction financing. Because auctions will require you to go through a double close process, it’s important to have a relationship with a hard money lender so you can have the required upfront cash to make the deal work.

A hard money lender is in the business of making short-term loans to real estate investors for purposes such as this. You will pay interest or a fee for the privilege of using someone else’s money to make the purchase.

Identify Auctions

To find traditional auctions, start by browsing local government real estate auction websites or contacting them directly regarding upcoming auctions. You can also find auction listings on sites like Auction.com, Zillow, or RealtyTrac.com, where you will be able to input your desired location and get a list of upcoming auctions and their status.

If you have your real estate license and access to your local multiple listing service (MLS), you can search for properties that are scheduled for auction.

Prepare To Bid On Properties

Once you’ve identified a potential property, do your due diligence before bidding. If possible, inspect the property in person. Otherwise, review all available photos and information. Check for any liens against the property.

Calculate the home’s after-repair value or ARV so you know your maximum allowable offer (MAO). You don’t want to bid too high and win, only to have trouble finding a cash buyer who is willing to purchase it at a price that still provides you a decent profit. When estimating your costs, include the interest you will pay for the ability to use the hard money lender’s cash in the deal.

Bid And Win A Property

You will need to register at the auction and provide proof of funds before you can bid on a property. Be sure you understand the rules of the particular auction you are participating in. Some auctions require a refundable deposit at the time of registration.

In most cases, settlement takes place immediately after the auction or shortly thereafter. This differs from non-auction wholesaling where you go under contract and assign your interests to an investor prior to closing on the property.

Wholesaling an auctioned home involves double closing. Double closing simply means two real estate transactions occur simultaneously or nearly so.

It is not specific to auctioned homes and includes three parties: the seller, the wholesaler, and the end buyer. In this case, the end buyer is the investor. This is the reason for securing a hard money loan or other types of transactional funding.

Some wholesalers opt to go the wholetailing route, which means they close on the property, then relist it on the open market after completing minor or no repairs.

Sell To A Cash Buyer

Once you have completed the transaction to purchase the auction home and received the title, it is time to sell to the cash buyer. This is where you make your profit. For example, if you win an auction for $100,000, you can turn around and sell to an investor for $110,000. You can then realize a $10,000 profit minus the cost of the hard money loan.

While your profit is typically smaller than what a flipper might expect after rehabbing a property for three or four months, the speed at which you can turn a deal over in wholesaling and the comparatively minimal risk makes it appealing to real estate investors.

You can also check out this quick video below that talks about how to find cash buyers online for free!

                                                                      

How Do You Find Auction Properties To Wholesale?

Your best bet for finding out about real estate auctions is to contact the county government in the area you are focusing on. Local government officials should be able to provide you with a list of upcoming auction dates as well as the properties being auctioned. You can get this information either by calling or visiting, although most local governments will also have this information available online.

As noted above, another option for finding real estate auctions is using a site like Auctions.com or RealtyTrac.com, among others. These sites include listings of both online and in-person auctions.

If you have a good working relationship with a Realtor or real estate agent, they are another potential source for information on auctions.

                                                                      

Wholesaling Houses From An Online Auction

One of the biggest differences between traditional auctions and online auctions is that you typically don’t have to produce the cash for the full purchase price immediately at the end of the auction with an online auction platform. You often have a couple of weeks to get your financing in order, though this varies by auction. This is another reason these platforms have grown in popularity.

While foreclosures are more likely to be sold at in-person auctions, REO properties—those that are bank-owned—are more likely to be sold at online auctions. It’s especially important to review the rules for each auction you’re interested in before bidding due to differences among auctions.

Before you can bid on a property through an online auction, you will be asked to register and, in many cases, put down a refundable deposit. The purpose is to ensure anyone taking part in the online auction is a serious bidder and has a valid account and a significant amount of funds or credit available.

Some of the homes auctioned online are still occupied, so you may not be able to inspect the interiors of the homes you target. However, you can still drive past the exterior as well as check out the neighborhood. In some cases, however, self-tours are allowed and this information will be available on the property listing.

The online auction will provide available documents for each property, including a property report, title report, and purchase agreement. You can also learn the reserve price, as well as estimated resale value and other information.

Typically within 24 hours of placing a winning bid, you will need to provide proof of funds. As with traditional auctions, nearly all properties are sold on an “as is” cash basis. While you typically do not have to provide your cash payment immediately, you will ultimately be paying for wholesale properties in cash to complete the purchase.

Keep in mind that in most cases, sellers are going to have the right to accept or reject bids, even if yours is the highest bid. If the property is a short sale, both the seller and seller’s lender must approve the winning bid.

                                                                      

Where Can You Purchase Online Auction Houses?

wholesaling auction properties online auction houses

There are a number of platforms operating as online auction sites for residential real estate. Here is a closer look at some of the more popular ones out there.

Hubzu.com

Hubzu.com is an established online auction site that has sold over 230,000 properties to date. In addition to bank-owned homes, Hubzu auctions include privately owned homes, pre-foreclosures, and short sales. The site offers auction houses as well as houses for direct purchase.

You must register on the site before you can place a bid. Hubzu notes on its website that all buyers and sellers are verified and charges a one-time small fee for this. Some properties also have a technology fee added to the purchase price.

Before placing a bid, a buyer must complete a bid deposit process. The bid deposit is a hold against a buyer’s credit card until the end of the auction, whether the bidder ultimately bids on a property or not. Winning bidders who don’t follow through with obligations for completing the sale forfeit the bid deposit. A bid deposit is required for each property you bid on.

Winning bidders will see the bid deposit removed once they’ve successfully made an earnest money deposit with a third-party escrow agent within the purchase agreement’s timeframe.

The minimum required earnest money deposit is based on a predetermined percentage of the bid or offer amount. The required deposit ranges from 1% to 7%, with a minimum of $1,000 and a maximum of $15,000.

Auction.com

Auction.com is another well-established online real estate auction site. The platform has about 16,000 properties for sale at any one time and bills itself as the nation’s largest online auction marketplace. The site has chalked up $52 billion in sales to date and has 6.3 million registered buyers.

Auction.com offers users of its site a number of video tutorials on how to navigate the site, place a bid, and research properties, among other topics. Participants must register to use the Auction.com site, but there is no fee to do so.

Investors on Auction.com can bid on foreclosures at in-person auctions as well as bid in online auctions of bank-owned properties on the platform. As with other in-person auctions, foreclosure auctions listed on Auction.com need to be paid in full at the close of the auction. Auction.com recommends investors bring a cashier’s check rather than cash, made out for 5% to 10% above your expected budget. This ensures you don’t lose out on a house because of a small amount of additional cash.

Some properties will be labeled as allowing in-person inspection. Each listing also includes the purchase agreement for review and the site reminds buyers to review the details prior to bidding.

A $2,500 bid deposit hold is placed on the bidder’s debit or credit card, an absolute requirement before bidding on the site’s bank-owned properties. The bid deposit must be made per property. The hold is removed on the Saturday following the auction.

As with Hubzoo.com, the seller has to accept the winning bid before the transaction can proceed.

Xome.com

Xome.com bills itself as a helpful site for those who are beginners in real estate investing. Xome.com claims the site has seen over 100,000 properties sold and $16 billion in sales to date.

Xome.com features both traditional listings and auction properties. The site states that its auctions include bank-owned, private-owned, second change foreclosures, short sales, and foreclosure properties.

As a wholesaler, you will need cash or a hard money loan to pay for your auction property. You’ll also need to provide an earnest money deposit within 48 hours of winning a bid. Closing can occur as soon as 10 days after the auction ends, at which time you will need to pay the balance of the purchase price.

The auction listings include both in-person and online auctions. Xome puts a $1,000 hold on your credit or debit card when registering to use the site. The hold is removed within 24 hours after an event ends if you are not the winning bidder. If you are the winning bidder, the hold is removed within 24 hours of making the necessary earnest deposit. There are no fees to register.

                                                                      

Wholesaling Auction Properties FAQ

Real estate auctions—whether in-person or online—can be a great source of properties for wholesaling. But with the varying rules and the process involved, it can be difficult to decide if wholesaling auction properties is a good option for your business.

The following questions and answers may help you decide what’s best for your business.

How Can You Get An Auction Property Under Contract?

Whether you are taking part in an online or in-person auction, you enter into a contract to purchase the home if you are the winning bidder.

Rather than assigning your purchase contract, as in a traditional sale, you will then enter into a sales contract to sell the property to an investor. This is referred to as a double close because once you close on the purchase, you will want to immediately sell to an investor and close on the sale.

This illustrates why it’s so important to have a network of investors as well as a source of hard money loans before wholesaling auction properties.

Can You Get Inside An Auction Property To Check For Repairs?

Auctions do not always allow a walk-through of the interior in person, which increases your risk. If you are new to wholesaling, you may not be able to afford the risk of ending up with a property you can’t sell to an investor at a profit. The home’s ARV is harder to calculate if you don’t have access to the interior, which in turn makes it difficult to determine your maximum allowable offer.

If that sounds like too much risk, you may want to consider narrowing your search to auction homes that allow pre-auction inspections. Of course, it’s possible you may not find any homes you like if you limit yourself to those that allow pre-inspections.

Another option is to look for properties with interior photos or interior videos available. If only an exterior photo is available, the interior could very well be in worse shape than the exterior.

Having the opportunity to visit the property will also let you see if it’s occupied. If there is evidence of squatters, you may need to add the cost of removing them to your estimate of expenses.

Do You Need Proof Of Funding To Have An Accepted Contract From The Auction Site?

For nearly all auctions, yes, you are required to show proof of funds—either in the form of cash or a cashier’s check—prior to registering for the auction and bidding.

Proof of funds can be proven via cash or cash equivalent. Proof can take the form of recent bank statements, brokerage account statements, bank letters, or proof of an existing line of credit.

                                                                      

Final Thoughts

Auctions are an excellent place to find homes for real estate deals. You can often get these properties under contract at a price considerably below the market price. But auctions also require cash payments and you will purchase the property rather than assigning your purchase rights.

You will need to conduct a double close to make the wholesale deal work. Unless you have enough cash on hand to close on a property, you’ll want to build a relationship with a hard money lender to finance the first stage of the deal.

When sourcing houses from auctions, be sure you review and understand all rules, keeping in mind these differ from one auction to the next. You’ll also want to be sure you’ve done your due diligence, including checking for claims and liens, as well as ensuring occupancy status.

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