How to survive the due diligence process

There aren’t a lot of differences between buying real estate through a traditional broker and buying real estate at auction. Both forms involve bidding and negotiating with a seller in one form or another, and both try to close within 30 days. One of the key differences to buying at auction, however, comes in what happens in those 30 days.

With a traditional real estate purchase, appraisals and inspections are conducted after a price is agreed upon, but before closing, providing the option to negotiate and compromise on any surprise costs throughout the process.

With an auction, however, all the “homework” is conducted prior to the purchase. For a seller, one of the benefits of using the auction method is that it provides him a time-specific date to sell and close on his property. With that, he sacrifices some of the price he may receive, which is passed on to the buyer. After you’ve done your research on the front end, be sure to calculate whatever faults you find into your high bid price. Since most auctions sell real estate “as is, where is”, you should always know what you’re buying and bid on a non-contingent basis. If the property needs a new roof, be sure to deduct that price from your highest bid, since there’s no negotiating with the seller afterwards.

So what should you look for when you’re doing your due diligence? First of all, if you don’t have much real estate experience and are interested in buying at auction, I would recommend hiring a broker. At a J. P. King auction, you can hire a broker at no additional charge to you if you’re the winning bidder. We pay a broker that represents a buyer. These professionals can help you obtain comparable sales information and market information, along with being able to recommend someone to hire for inspections. You may also want to check for registered sex offenders, school information, and transportation and utility providers. Property information would include a home inspection report, termite inspection, taxes and insurance cost and HOAs if applicable.

If you do discover any problems related to the property, it is important to have professional advice, including an accurate quote to correct the property issues. In an ordinary transaction, you can ask the buyer to correct those issues or take the price out of the sales price, but that rarely is the case when purchasing at an auction. When you’ve done your due diligence and know this information on the front end, you know to adjust your price accordingly. A little personal advice, remember that most repairs cost more than expected and often lead to other updating expenses, so be sure you don’t overpay for a property.

Have you ever bought a property at an auction? How did the due diligence process work for you — better or worse — versus a traditional transaction?

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~ by Craig King on February 22, 2011.

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