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Do you Need Cash to Buy a Home at Auction?

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It’s no secret that foreclosed homes make great investments because you can usually buy them for much less than the market value.

Whether you fix and flip the home or fix it and rent it, you invest less money in the home initially, which may mean larger profits. Some of the best deals occur at the foreclosure auction, but many say ‘cash only’ does that mean you literally need cash or you can’t buy the home?

Fortunately it doesn’t – you have several financing options.

What Does Cash Only Mean?

First, let’s explain cash only. In the literal sense, it means you come to the auction with the exact price you bid, but most people can’t do that. It can also mean that you come to the auction with some of the money, say 10 – 20%, and come up with the rest in a short period (usually a month).

So what does that mean? You could secure the remaining 80 – 90% in bank financing, whether a traditional bank or hard money lender.

Typically it’s best to go the hard money lender route, though. Here why.

Hard money lenders work faster. They approve loans in as little as a day and fund them in less than a week. Traditional lenders can take as long as a few weeks to even approve your loan and 45 days or more to fund it. That would leave you outside of the auction’s guidelines and cause you to lose the home.

Other Ways To Get Cash To Buy A Home At Auction

Beside hard money loans, your other options to secure financing for a cash-only auction include:

Cash-out your home’s equity

 If you have more than 20% equity in your home, you may use it to buy the investment home. Even hard money lenders offer to refinance mortgages that have attractive terms, and again, fast financing. If you don’t use a hard money lender, make sure you go through the underwriting process long before you attend the auction so you have the funds in time. Whether you have them at the auction itself or within 30 days, you’ll need the funds to pay for the home.

Secure a personal loan

Depending on how much money you need to buy the home, you may secure a personal loan. They usually have higher interest rates and shorter terms, so make sure you can afford the loan before taking it on.

Peer-to-peer lending

If you can’t secure traditional financing or a hard money loan, peer-to-peer lending may be an option. Be careful with the terms, as they are set according to each investor and/or platform. They typically fund quickly but have much higher interest rates than other options.

Should You Pay Cash At A Real Estate Auction?

Before you buy a home for cash at an auction, consider your circumstances.

  • Are you depleting all your reserves? If so, how will you cover emergencies either with your own home or the home you invested in? What if you lose your job or your investments fall apart? If you don’t have cash reserves to fall back on, you could end up in a financial bind. Taking out a loan helps free up that cash and gives you room to handle emergencies.

  • What’s the opportunity cost? If you tie up all your cash, you can’t invest in anything else for the time being. Is the investment worth it? What are you not investing in so that you can buy the home? Would it make more sense to borrow the money and use your cash to invest and compound the earnings?

Final Thoughts

Cash auctions don’t necessarily mean you must arrive with all cash. It could mean many different things, including paying some of the money in cash when you bid and the rest within a short period, which you secure from some type of financing. Once your financing funds, you’ll have the cash to pay for the home and satisfy the terms of the auction.

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