How to Buy a House at Auction Without Cash

Real estate investors are always looking for great deals.  A great place to find them is real estate auctions because the properties may not be listed on the MLS, so there is less competition from other buyers. 

The problem is most investors that are first starting out do not have the required liquid cash to buy properties outright at auction.

But what if you could actually buy a house at auction without cash?

This is a great tactic for new investors with limited financial resources.

The Two Types of Real Estate Auctions

There are two different types of real estate auctions: live auctions (done in-person) and online auctions.  

Live auctions usually take place at the courthouse steps, although they can take place at any public location. Sometimes these auctions are even handled at the property being sold.

Online auctions are real estate auctions that take place online.  While there are a number of online auction sites, is currently the most well-known.

The duration of the auction is the main difference between live auctions and online auctions. Where live auctions may span a few hours, online auctions typically last for more than one day.  This time difference creates a big potential opportunity for buyers who lack cash.

Can You Buy a House at Auction Without Cash?

In many cases, you do not need cash to buy a house at auction at all.  

Some sellers at auction will only accept cash offers. This often happens in fast-moving markets and where the property needs a lot of rehab. 

Just getting the financing from a lending institution fast enough can be an issue due to the quick auction closing window (typically only a few hours). This period of time often does not give the bank enough time to provide the financing an investor needs.  

Furthermore, banks do not usually finance properties needing major repairs, which is essentially what most houses need that end up at auction.  

Big problem, right?

So, how do you get the cash to get into a foreclosure auction property?

How to Buy a House at Auction Without CashSources of Quick Cash for Foreclosure Auctions

Private, personal loans from peer-to-peer lending sites can provide funds. These sites help to connect investors with individual lenders. Some peer-to-peer groups require that your credit history and assets meet certain criteria.  However, a new investor’s track record might be an issue for peer-to-peer lenders who may be skeptical of their ability to make a profit.  Peer-to-peer lending is a good way to augment your cash account before the house foreclosure auction.

Hard money lenders base their loan decision on the collateral you put up, rather than your credit score, assets, or real estate investing experience.  There are hard money lender groups in most areas, which means they are familiar with the local real estate market.  They make their money by charging higher interest rates than a bank would, in exchange for the fast availability of cash.  If you’ve done your homework before the auction, you can often provide a hard money lender enough information on your desired property that they will have the documentation complete and cash available in time for the auction close.

Home equity lines of credit, credit cards, or even life insurance policies can provide needed short-term funds as well.  These are expensive sources of cash, so be careful.  Definitely take the peer-to-peer or hard money options first.

As mentioned above, if you’re bidding at an online auction, rather than the courthouse steps, then you generally have a longer time window to get the cash financing needed to close on a foreclosed property.

Refinancing After the Auction Is Done

The problem with peer-to-peer and hard money lenders is they charge higher interest rates for fast turnaround or risky foreclosure loans.  So you don’t generally want to rely on these sources of cash as long-term financing vehicles. 

If the house you buy at auction requires a lot of rehab work, then it is going to take time to repair and market it properly.  Also, when you buy foreclosure properties during down markets, it can often take a while to resell them.  You don’t want to pay more than you need to in financing costs during the holding period before you flip the property. 

One solution is to obtain cheaper long-term financing after the deal is done, and you’ve begun repairs. This allows the buyer to rehab the property to a level the bank can accept and will actually finance.

Buyers should also consider neighborhood banks for financing if the larger national banks are not interested.  If you can show adequate cash, credit, and a good market value rehab plan, then most neighborhood banks will work with you. 

Smaller local banks will have certain requirements to be fulfilled, just like the national ones. Among them is the loan-to-value ratio, which divides the total mortgage lien to the appraised value of the property. Also, the buyer’s credit score is also important, so they should check their credit score before attempting a deal. For instance, a score of 740 or lower can mean additional money is needed for the same interest rate loan. 

Buying a House at Auction Without Cash

Buying a house at auction when you’re short on cash is possible using any combination of the options presented here. Keep in mind that not all properties sold at auction are in foreclosure or facing foreclosure. Also, foreclosure properties can come with all sorts of surprises that can affect their profitability when sold later on. It is up to the buyer to be well prepared and use all available resources to help them through the process.

Learn More…

Learn about How to Find a House Foreclosure Auction in this article >

For more info on how to buy houses through auctions with minimal cash, see this article from the Wall Street Journal.

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