House flipping has become an increasingly popular strategy in real estate investment. Investors often look for ways to buy undervalued properties, develop them, and sell them for a payoff. However, two main avenues usually come to mind when sourcing these properties: MLS listings and auctions. Both can be effective, but each has distinct advantages and challenges. Understanding the differences between MLS listings and auctions is crucial for deciding to flip houses.
The Basics: MLS Listings vs. Auctions
To start, let’s break down the two main ways to acquire properties for flipping.
MLS Listings refer to properties listed on the Multiple Listing Service (MLS), a database real estate professionals use to share property information. Licensed real estate agents typically market these properties, which can be found on various websites.
On the other hand, auctions are public sales where properties are marketed to the highest bidder. These properties may be foreclosures, tax lien properties, or estate sales, and they are often sold as-is, without contingencies. Auctions can occur in person or online, providing a unique opportunity to purchase properties that may not be readily available on the MLS.
Now, let’s dive into the specifics of each method and explore how they compare for flipping properties.
MLS Listings: Advantages and Disadvantages
Advantages of MLS Listings
Wider Selection of Properties
The MLS is one of the most extensive sources of real estate listings, providing various properties in different conditions and price ranges. If you’re looking for homes in desirable neighborhoods or certain types of properties, the MLS is likely to have a vast selection.
Transparency
MLS listings come with detailed property characteristics, like specifications about the number of bedrooms, bathrooms, square footage, and photos. This transparency assists you in making an informed decision before making an offer, as you can assess the property’s value and condition based on the listing.
Easier Financing
Properties purchased through the MLS are typically financed through traditional lending institutions. This can make securing a mortgage more manageable, as lenders are more ready to finance properties with clear titles, standard market conditions, and complete inspections. This is a significant advantage if you’re a real estate investor who plans to fund your flip.
Less Risk of Hidden Issues
While MLS-listed properties can still have issues, they tend to be in better condition overall compared to auction properties. Sellers usually provide disclosures about any known problems with the property, giving you a clearer image of what to expect.
Negotiation Opportunities
MLS listings are often priced with some room for negotiation. If you find a slightly overpriced property, you may negotiate a lower price with the seller, especially if the property has been on the market for a while.
Disadvantages of MLS Listings
Higher Prices
MLS-listed properties typically have a slightly higher asking price than properties sold at auction. Sellers often price properties based on market value, so you may not find as many below-market deals. As a result, there’s less potential for an enormous profit margin when flipping a home purchased from the MLS.
Competition from Other Buyers
Since MLS listings are available to all buyers, there’s often significant competition, especially for attractive properties in desirable locations. This means you may need to act quickly or bid higher to secure a property.
Less Flexibility in Terms
When you purchase a property through the MLS, the terms of the sale are generally fixed. For example, you may be required to complete an inspection or provide an earnest money deposit upfront. These fixed terms may limit your flexibility as an investor.
Sellers Can Be Less Motivated
While some MLS sellers may be motivated to sell quickly, others might not be. If the seller is not in a hurry to sell, they may not be willing to accept your lower offer or negotiate on price. This can make it more challenging to secure attractive deals for flipping.
Auctions: Advantages and Disadvantages
Advantages of Auctions
Potential for Lower Prices
One of the biggest draws of buying a property at auction is the potential to acquire it at a much lower price compared to the MLS. Auctions often sell properties for below-market value, especially when there are few bidders or if the property has issues that may deter others from purchasing. This presents a significant chance for real estate investors looking to maximize their profits.
Opportunity for Speed
Auctions are fast-paced, and if you’re ready to move quickly, you can secure a property in days or even hours. This is ideal for investors looking for quick turnaround times on their flips.
Less Competition
Although there can still be competition at an auction, especially for highly desirable properties, the competition is typically less intense than what you’d encounter when bidding on an MLS-listed property. If you can spot a good deal early, you can win the auction without facing significant competition from other buyers.
As-Is Properties
Many auction properties are sold “as-is,” which can benefit investors comfortable renovating projects. If you’re experienced with handling fixer-upper properties, this can provide an opportunity to add value to the home and increase your profits quickly.
Disadvantages of Auctions
Limited Information
Unlike MLS listings, auction properties typically come with limited information. You may not have access to detailed property inspections or disclosures, and many properties are sold without guarantees. This can make it difficult to assess the full scope of repairs or renovation costs needed to flip the property profitably.
Higher Risk
Since auction properties are often sold as-is, a higher level of risk is involved. You may encounter hidden issues, such as foundation problems, electrical or plumbing issues, or mold, that could significantly increase your renovation costs. For investors who don’t have the expertise to assess these problems beforehand, the risks can outweigh the potential rewards.
Non-Contingent Sales
When purchasing a property at auction, there are usually no contingencies, such as inspection or financing contingencies. This means that once you place a bid and win the auction, you are committed to purchasing the property, even if you later discover issues that were not initially apparent.
Upfront Costs and Fees
In addition to the winning bid, significant fees may be connected with buying a property at auction, such as buyer’s premiums, administrative fees, and taxes. These costs may add up quickly and eat into your profit margin.
Potential for Title Issues
Auction properties may come with title issues, such as unpaid liens or claims against the property. If these issues are not resolved before the auction, you may inherit the problems once you take ownership of the property. This can create legal challenges and additional costs in the future.
MLS Listings vs. Auctions: Key Comparisons for House Flippers
Price
In general, MLS properties tend to be priced higher than auction properties. However, this doesn’t necessarily mean that MLS properties are a worse deal for flipping. If you can find a property that needs minor updates or repairs, it may still offer a decent profit margin despite the higher price.
Risk
While MLS properties offer more transparency and less risk, auction properties come with greater risk due to the lack of information and the “as-is” nature of the sale. MLS listings may be the better option for new or risk-averse investors.
Speed
Auctions tend to be much faster than MLS purchases. If you’re looking for a quick turnaround and willing to take on the associated risks, an auction property may be the better choice. However, MLS listings offer a more predictable and stable process.
Profit Potential
While auctions offer a more significant potential for below-market deals, the risks associated with hidden problems and unknown costs can eat into profits. MLS properties tend to have fewer surprises but may offer a smaller profit margin due to the higher purchase price.
Frequently Asked Questions(FAQs):
Can I finance an auction property?
Financing options for auction properties can be more limited than MLS-listed properties. Some auction houses may require full payment in cash, and getting financing for an auction property may be challenging, especially if the property is in poor condition.
Are auction properties always in bad condition?
Not necessarily. While many auction properties are fixer-uppers, there are also auction homes in good condition or requiring only minor repairs. It’s essential to research the property and the auction terms before bidding.
How do I know if an auction property is a good deal?
Research is key. Attend a few auctions to learn about the process and observe how much properties are selling for. Whenever possible, try to get access to the property before the auction to assess its condition.
What should I consider before bidding at an auction?
Ensure you understand the auction process, the terms of sale, and any fees associated with the purchase. It’s also a good idea to set a budget and stick to it, as bidding may become competitive and fast-paced.
Can I inspect an auction property before bidding?
It depends on the auction. Some auctions allow potential buyers to inspect the property before the auction date, while others may not offer this opportunity. It’s crucial to find out the auction’s rules beforehand and, if possible, arrange a visit to assess the property’s condition.
