Once you’re past the decision to use real estate auctions as a viable option to purchase or sell a property, some of your bigger questions might revolve around how to pay for a property at auction, especially if you’re the highest bidder. Some questions that may come to mind include:
Can I get a loan for the auction process? Do I need to pay cash? Are there any other finance options for auctions?
At Platinum Luxury Auctions, we’re well-versed in sharing with you the best ways to pay that work for you and apply to auctions. We’re experts in luxury real estate auctions and mansion auctions and use our knowledge to auction luxury homes.
We’ve gathered the main funding sources you’ll see at luxury real estate auctions:
Paying in Cash
Cash is typically the primary form of payment when it comes to property auctions; it’s the most common form of payment. Most of the properties you’ll find being sold online or in person will only take cash as payment for the property. This doesn’t mean that the seller will only take cash–and neither do you need to bring a stack of bills. You can also pay through the cashier’s check or credit or debit card.
Cash in the bank isn’t available to everyone purchasing a luxury property. Suppose financing options for the property aren’t an option. In that case, cash flow for the payment can be channeled through monetary loans from family, friends, or partners who want to back your investment purchase or decision to buy a vacation home.
Before you want to buy, check the terms of the property you have your signs on so you have the full amount you’re willing to bid on hand. Include any fees you might need to pay, like the buyer’s premium or any earnest money deposit.
If you’re buying a property at an in-person auction, the odds are that you’ll be required to pay upfront at the time of sale. You won’t be able to go to the bank and pull out that amount. In that case, come prepared for an in-person auction with a variety of cashier’s checks in different amounts so you can get as close to the final bid amount as possible.
Payment in the form of a Traditional Mortgage
You might not have the amount in the bank that would allow you to buy the property on its own outright. That’s alright, as some online auction properties allow for financing options. You won’t need to have the cash upfront to make the purchase.
Financing options will vary based on each property in your auction search. While some luxury properties can be funded by a traditional mortgage, others won’t be. Typical finance options include fixed-rate, adjustable-rate, conforming (FHFA), non-conforming, and government-issued loans like FHA, USDA, and VA.
Each specific loan type might have its requirements and stipulations, so ensure that you know what a potential loan might entail for you as a borrower. Aside from your loan, ensure that you have the down payment, earnest money, buyer’s premium, or any other fees covered for your property purchase. You could potentially roll some of these options into your loan based on the terms.
Specialty Loans for Investors
A few properties you come across may give you the option to finance it through a specialty loan. These short-term loans are meant to give capital to real estate investors. Several types of specialty loans exist at auctions, including:
- Fix and flip / bridge loans – Also known as hard money loans, these are great for short-term financing and flipping a property that’s meant to be held for a short amount of time and then sold for profit.
- Debt-service coverage ratio (DSCR) loans – Also known as investment loans or rental loans, buyers who qualify for DSCR loans are showing proof of rental income from existing properties in their portfolio, not on their personal income. You will need prior experience as an investor to be eligible.
Specialty loans mean that cash will be paid directly from a third-party lender to the seller. The seller will then receive the cash payment in full at the time of closing. Don’t expect any appraisal or inspection requirements with these types of loans or for the buyer to provide a down payment. It’s an overall efficient process.
One major stipulation is that the buyer must have a solid credit score with the proven ability to pay back the loan quicker than they would a traditional loan, ranging from around three months to a year. Specialty loans traditionally have higher interest rates than you would discover in a typical mortgage.
Aside from the more popular and well-known methods, there are several alternative ways to purchase auction property based on circumstances and the particular property itself.
FHA 203k loan
An FHA 203k loan is typically a mortgage loan that has within it a pre-approved amount for renovations. If you’re looking to fix and flip and make the property your primary residence as you do the renovations, this is the type of loan for you. For real estate investors who might not have the upfront capital to fund renovations, the FHA 203k loan is a wise option. With this type of loan, you’re more able to finance a property via mortgage at a lower interest rate and enjoy write-offs on closing costs and the loan’s monthly interest. You can also use the budget meant for renovations to make the property more valuable and then sell it for a profit.
Home equity line of credit (HELOC)
You might know it as a home equity loan or HELOC. This is a line of credit on your current primary residence that can go towards renovations on your home or other expenses. It’s also used as a capital source for investments in other luxury properties. The interest rate on the HELOC loan is typically lower than other types of short-term or specialty loans, and you may be able to receive some write-offs on the interest.