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How much value do you put for unknowns when buying a property in auction? 

How much value do you put Value for unknowns when purchasing a property in auction? 

EXECUTIVE SUMMARY:Summary of things a buyer should know in buying a foreclosure REO property

How much value do you put value for unknowns when purchasing a property in auction?

In most parts, purchasing a property at auction will be different than regular (non-auctioned, non-foreclosed) sales. One of the differences is that at auction, the purchaser buys the property “AS IS” with no promises to fix/repair or warranty.

Disclaimer:: DisclaimerNot all points specified here should negatively impact your decision to purchase a property at auction nor applicable for all banks and properties. Each auction or “foreclosure at court step” sale is different and requires a lot of details to be handled when buying a property at auction. Consult with your real estate agent and/or your real estate attorney for questions regarding purchasing a property at auction.

As we stated earlier, the real question is that, in view of the purchaser, how much value (if any) he/(she) should account for all these unknowns when buying a property at auction vs. when he is buying regular sale property. The answer is different for each case and each type of purchaser and their personalities, e.g., individual looking to live in the property or investor that wants to flip and profit.

Summary of unknown facts are listed below.
Note: I put these percentages (in red color) based on my experience and assuming property values at $200,000. I would like to receive your comments, inputs and suggestions based on your experiences and expertise.

1.    Property is “AS IS” with no promises to fix/repair or warranty.
The condition of the property and not to be move-in ready, might have some negative psychology impact on some purchaser. Please note that we are not talking about the repair cost here, just psychology impact.


What percentage of the purchase price do you think we need to put here?
For individual looking to live in the property                0.5% of the Purchase Price

For investor to flip-over the property                          0.0% % of the Purchase Price

 

2.    No Seller Disclosure Notice. It means you will not get the history of the things that had happened to the property (if any). For some buyers, this could be a discomfort or an issue, for other may not.

What percentage of the purchase price do you think we need to put here?
For individual looking to live in the property                0.5% of the Purchase Price

For investor to flip-over the property                          0.0% of the Purchase Price

 

3.    No Option Period and No Unrestricted Rights to Terminate the Contract,
When you bid and win, you must buy and have no right to terminate (at least without a lot of penalty).

What percentage of the purchase price do you think we need to put here?
For individual looking to live in the property                1.0%  of the Purchase Price

For investor to flip-over the property                          0.0% of the Purchase Price

 

4.    Not Knowing the Condition of the house and No Inspection.
Not having inspection and knowing condition of the property is a major risk that should be accounted for.

What percentage of the purchase price do you think we need to put here?
For individual looking to live in the property                0.5% of the Purchase Price

For investor to flip-over the property                          0.0% of the Purchase Price

 

5.     Special Warranty Deed Instead of General Warranty Deed
Banks only warrants the title against their own actions or omissions. They warrant nothing prior to their taking title.

What percentage of the purchase price do you think we need to put here?
For individual looking to live in the property                0.1% of the Purchase Price

For investor to flip-over the property                          0.0% of the Purchase Price

 

6.    Non-Guaranty Acceptance of Offer:
Seller can back up from his acceptance or contract and owe nothing except returning buyer's money. Loss of times, efforts, expenses and opportunities for other purchases.

What percentage of the purchase price do you think we need to put here?
For individual looking to live in the property                0.5% of the Purchase Price

For investor to flip-over the property                          0.1% of the Purchase Price

 

7.    Non-Performance Charge.
If you fail to pay the entire amount with cash instrument (e.g., cash, cashier check or money order), immediately or after few minutes of winning, you will be at default and must pay a large amount of penalty (in Collin County this penalty is 20%).

What percentage of the purchase price do you think we need to put for each item listed above?
For individual looking to live in the property                0.5% of the Purchase Price

            For investor to flip-over the property                          0.1% of the Purchase Price

 

Summary of total unknown facts values

Summary Total:
These soft values vary greatly from a purchaser to another purchaser.

The question is that, in view of the purchaser, how much his entire purchase money worth more compare to low down payment and getting the loan.


What percentage of the purchase price do you think we need to put for each item listed above?
For individual looking to live in the property                2.7% of the Purchase Price

For investor to flip-over the property                          0.2%% of the Purchase Price


In
our example, where the house value was assumed $200,000, these inconveniences and  psychology impact on some purchaser (if any) translate in $5,400 and $400 for individual planning to live in the house and for investors planning to fix/repair and flipping over and sell it back to public for profit, respectively.

As we stated earlier, the real question is that, in view of the purchaser, how much value (if any) he/(she) should account for all these unknowns when buying a property at auction vs. when he is buying regular sale property. The answer is different for each case and each type of purchaser and their personalities, e.g., individual looking to live in the property or investor that wants to flip and profit.

I would like to receive your comments, inputs and suggestions based on your experiences and expertise.

For more information on Foreclosure Process and purchasing foreclosed (REO) property, please visit http://www.TexasFiveStarRealty.com/Foreclosure_Process.asp

For a current list of foreclosed (REO) properties in North Texas, please visit http://www.TexasFiveStarRealty.com/List_of_Foreclosures.asp

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Bahman Davani, CM
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