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Financing A Barrier Preventing Buyers From Purchasing Affordable Properties At Auction

Navi Persaud
Feb 10, 2022
Photo of an auction sign in a neighborhood. Credit: iStockphoto.com/VM_Studio

The Urban Institute recently published a study on why there are so few people purchasing affordable properties at auction, with financing being among the barriers reported.

The Urban Institute's study found that most states do not structure auction sales to facilitate purchases that require financing for affordable properties at auction. Barriers to financing include the inability to inspect a property in a foreclosure sale, as well as full payment being due at the time of auction in most states.

If a home cannot be inspected, lenders have more of a reason not to provide financing for the home, thus, providing full payment at the time of auction becomes impossible for buyers. Additionally, once a buyer has won the auction, they cannot back out of the sale, no matter what they find.

“Only 4.1% of REO properties sold on Auction.com could access a traditional purchase mortgage. This reflects the fact that the property must be appraised, which is difficult if a tenant is in place. Moreover, traditional purchase mortgages are based on the property’s 'as is' value,” according to the study.

“Most Auction.com properties are in a condition where a mortgage based on the before-repair property value is going to be insufficient; the necessary rehabilitation is such that a renovation loan is necessary.”

Additionally, of the properties that did not sell at auction, conventional mortgage purchase financing was available for just 1.4%, according to The Urban Institute. The institute does note that access to financing varies by state. 

The report suggests that increased access to financing for auction properties could increase the share of owner-occupant purchasers. For lenders, this could mean developing financing options to assist buyers who aren't afraid to purchase a home through auction.

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