Exploring Financing Options For Auction Properties
If you’re interested in real estate auctions, some of your biggest questions might be about how to pay for a property at auction if you find yourself to be the highest bidder. Can you get a loan for an auction? Do you have to pay cash? Are there any other auction finance options?
Financing your property auction purchase may vary based both on the seller and the property type, and the details may be a little different from any previous property transactions you have experienced.
When you purchase an auction property, having readily available funding is key. Cash is often the preferred method of payment in these fast-paced sales. But depending on the specific auction property and seller, there may be multiple financing options available beyond just cash. Here are some of the funding sources you might see in real estate auctions:
Why cash is common – but not your only option
While many auction listings note “cash only” that doesn’t mean you’re completely out of options. Securing financing for auction properties is possible – it just takes extra planning and the right lender and loan type.
Start by reviewing the auction terms carefully to see whether the property allows financing. Some online and in-person auctions accept buyers using short-term ‘hard money’ loans or bridge loans, which can help you secure the property quickly, and refinance later into a traditional mortgage. If conventional financing isn’t permitted, there are alternatives still available, such as tapping into home equity, using a line of credit, or partnering with an investor to provide up-front cash.
You should confirm exactly how much you’ll need on hand for the deposit, buyer’s premium, and closing costs. Preparation is key – the more financing options you explore before auction day, the more confident and prepared you’ll be when it’s time to bid.
Pro tip: Learn how the entire auction process works before you bid. The Beginner’s Guide to Real Estate Auctions: Learn, Bid, Win walks you through the basics, from registration to financing options.
How to finance auction properties without using cash
1. Traditional mortgage
What if you don’t have funds on hand to purchase a property outright? Some properties listed for online auction may show that they have financing available, meaning that you don’t necessarily have to have cash in hand to make the purchase.
Financing options may be different for each property in your auction search, and some properties may be able to be funded by a traditional mortgage.
A traditional mortgage is a loan provided by a lending institution such as a bank. This type of loan usually has requirements attached, which could be things like:
● A down payment from the buyer (typically 3-20% of the sales price)
● An appraisal and inspection of the property
● A good credit score from the buyer
Traditional finance options include fixed-rate, adjustable-rate, conforming (FHFA), non-conforming, and government-issued loans such as FHA, USDA, and VA.
Each particular loan type may have its own requirements and stipulations, so make sure you understand exactly what a potential loan may entail for you as a borrower.
In addition to your loan, make sure that you’ve got any down payment, earnest money, buyer’s premium, or other fees covered for your property purchase. You may be able to roll some of those things into your loan, depending on the terms.
2. Specialty loan
Some properties may show that they are eligible to be financed through a specialty loan. These are short-term loans, also referred to as hard money loans, specifically developed to provide capital for real estate investors. There are a number of different specialty loans, including:
- Fix and flip / bridge loans – These are also known as hard money loans. They are used for short-term financing and renovation of a property that is intended to be held for a short time and then sold for a profit.
- Debt-service coverage ratio (DSCR) loans – These are also known as investment loans or rental loans. Buyers qualify for DSCR loans based not on their personal income, but rather on the rental income from existing properties in their portfolio. These loans can be used to purchase a new rental property or refinance an existing one.
With a specialty loan, cash is paid directly from a third-party lender to the seller. The seller receives payment in full for the property at closing. These types of loans often don’t include any appraisal or inspection requirements or for the buyer to provide a down payment.
However, the buyer must have a solid credit score and the ability to pay back the loan to the third-party lender more quickly than a traditional loan, often within 3 to 12 months. Specialty loans also typically have higher interest rates than you would find in a traditional mortgage
3. FHA 203k loan
An FHA 203k loan is a traditional mortgage loan that includes a pre-approved amount for renovations. This is a great type of loan for properties you want to fix and flip as long as you’re willing to make the property your primary residence while you do the renovations.
This can be an attractive option for real estate investors who may not have the capital in hand to fund renovation efforts. By using an FHA 203k loan, you can finance a property through a mortgage at a low interest rate, write off closing costs and the interest paid each month on the loan, use the renovation budget to enhance the property, and then sell it for a profit.
4. Home equity line of credit (HELOC)
Also known as a home equity loan, this line of credit on your current primary residence is typically used to help fund renovations on your home or handle other expenses. But it can also be used as a source of capital to invest in other properties.
A HELOC loan usually has lower interest rates than other types of short-term or specialty loans, and the interest may be tax deductible.
It is possible to get a HELOC loan on an investment property, but this is considered by lenders to be a higher risk of default. There are much more strict requirements for qualification, interest rates would be higher than for a regular HELOC, and some lenders may not even offer the option.
5. Personal Loan
If you need quick access to funds and don’t have cash on hand, a personal loan for auction property can be a flexible solution. Personal loans are typically unsecured, meaning you don’t need to use the property or any other asset as collateral. Instead, your approval and loan amount are based on your credit history, score, and ability to repay.
You can apply for personal loans through banks, credit unions, or even online lenders, many of which offer quick approval and funding. That speed can make a personal loan an appealing option when you’re trying to move quickly.
However, it’s important to keep in mind that personal loans usually have borrowing limits, often topping around $50,000, which may not cover the entire purchase of an auction property. They also tend to have shorter repayment terms than traditional mortgages, so it’s important to confirm that you can comfortably manage the monthly payments.
Used strategically, a personal loan can bridge the gap between your available cash and the amount you need to bid, helping you secure a property opportunity that might otherwise slip away.
Make sure to finalize your auction financing before you bid
It’s key to make sure you have all the financing details ironed out ahead of time and all documentation ready to go so that you have a smooth experience when it comes to checkout and closing.
Remember, most auction properties are cash only, but there are some that may have financing available if that is what would work best for your strategy. Make sure to carefully read the details and disclaimers on any property auction you’re interested in so that you fully understand the available funding options, all associated costs or fees, and other important information.
Pro tip: On Xome.com, you can filter for listings that are cash only or financing available. Just click on the Featured button on the Xome Auction Search page!
No matter how you’re planning to finance your purchase, doing your due diligence and figuring out what fits your buying strategy will always be one of the most important things you do when preparing to bid on a property auction.
Want to start building up your real estate portfolio? Browse Xome’s auction inventory and homes for sale now and find your perfect property.
Real estate investing involves risks. Results may vary.
Frequently asked questions about financing an auction property
Question: How do you pay at the auction?
If you make the winning bid at an in-person auction, funds are typically due by the end of the day. Most auctioneers require payment by verified funding sources like a cashier’s check. Online auctions also require prompt payment shortly after winning the bid, either with a cashier’s check or wire transfer. For remote foreclosure bidding platforms like Xome’s xBid, buyers can wire funds directly through the application.
Question: How do you buy a house at auction with no cash
You can buy a house at auction without cash by using alternative financing options such as a personal loan, home equity line of credit (HELOC), FHA 203(k), specialty bridge or hard-money loans, or even a traditional mortgage if the property qualifies. These loans provide quick or flexible access to funds so you can meet auction payment deadlines without needing full cash on hand.
Question: What happens if you don’t have money on hand at an auction
If you don’t have money on hand or financing lined up, you won’t be able to place a valid bid. Most auctions require earnest or deposit funds immediately. Failing to pay on the spot or at the deadline can result in losing the property, forfeiting your deposit, and potentially being banned from future auctions.
