What primary restrictions exist in the financing of an auction sale?
While financing options may be available, it is important for buyers to understand that they need to perform their due diligence before participating in an auction or engaging in a contract of sale. Although auctions are a lucrative method of acquiring real estate, traditional forms of financing may not be available or suitable for every purchase. While sellers sell properties for a variety of reasons and there isn’t one standard rule of thumb that can be applied to all auction sales, it isn’t uncommon for auction sales to not qualify for conventional forms of financing due to different constraints – namely time, accessibility, or the property’s condition.
Time is a major factor in many auction sale contracts. Sellers are often in a crunch to sell a property in a timely manner, and as a result, they are often looking to settle a property in 30 days or less. As a result, many conventional forms of financing may not qualify, since loan underwriting can often take 45 days or more. If you are considering financing, please be sure to discuss the processing time with your lender.
Access & Inspections
Aside from the time commitment requiring the underwriting of a loan, many lenders may require access to a property to conduct an inspection. Auction sales will not typically stipulate access to the property for inspections. As a result, you, the buyer, may not be able to have certain inspections completed, as required by a lender. Be sure to consult with the auctioneer, terms of sale, and your lender to determine if a property may be accessible for an on-site inspection. It is also important to discuss whether or not the property may have the utilities turned on.
Outside of time and access, one of the greatest challenges buyers may find with a property is the condition that it is in. Buyers are encouraged to have open conversations with lenders about the property they are considering buying and the condition that it is in. Not all lenders understand the value of a distressed property. As a result, they may look for certain concessions to occur prior to settlement. In a traditional real estate environment, buyers and sellers usually come to a contractual agreement, a meeting of the minds, where the seller may agree to address certain issues.
Auction sales, however, do not typically have such concessions. Sellers ask buyers to perform their due diligence in advance of the auction – encouraging them to understand the full scope of work prior to submitting an offer or placing a legally binding bid. Consequently, sellers are often selling the property at a price that reflects the scope of work involved – the property’s true market value, without any contingencies or concessions.