Buying Real Estate at an Online Auction

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Most buyers don't intentionally try to bid for a home through an online auction. However, you can be searching for homes online and find the perfect listing with small print that says the sale is subject to an auction. What does that mean?

Where Online Auction Homes Originate

An online auction system is different from bidding for a home in person through a trustee's sale or a sheriff's sale. For starters, bidding is conducted via the web. It's all electronic. Further, contrary to popular opinion, not every home that is for sale through an online auction is a foreclosure. Some homes are short sales.

Others might be for sale by the bank as a bank-owned home. You can find websites where investors are unloading homes once purchased from certain banks, generally as a packaged deal of bundled homes, known as buying in bulk. The investors now want to obtain the highest and best offers for each house.

Most of the homes are distressed sales, but not every home that is up for auction fits that category. Investor-owned homes might be fixed up and ready to sell as a flipped home.

Flipped homes tend to feature contemporary paint, upgraded flooring, stone counters, and new appliances, all of which make them very appealing to a first-time home buyer.

Opening Bid Price for an Auction Home and Reserve Price

Much like a barker at a country circus, the online bid price is meant to attract your attention. It is not necessarily the sales price you will pay and might have little relationship to actual market value. The estimated bidding price might be 50% to 75% of the amount the seller actually hopes to receive. It's a starting point for the auction and usually lower than what the seller will accept.

Many auction websites will post the estimated market value. To determine true value, you will need to examine comparable sales. These are the sales prices of similar homes that have recently sold. These are not the sales prices of homes for sale—because sellers can ask any price they want, it doesn't mean the home will sell at the asking price. Only the final sales price of a closed sale within the past few months is a comparable sale.

The bidding often will begin at the bid price and move up.

Most sellers have a secret reserve price. If the reserve price is not reached, the seller is not required to sell.

For example, a seller might submit a home listing worth $400,000 at an enticing opening bid of $200,000. Buyer A might bid $200,000. Buyer B might bid $225,000. Buyer A might then raise their first bid to $235,000.

If the seller's undisclosed reserve price is $375,000, this home will not sell to any of those bidders, and the auction will not be finalized—which to some people seems to defeat the purpose of an auction.

Bidding for a Home at an Online Auction

Once an offer is accepted, if you decide later to cancel, the earnest money deposit could be at risk. Buyers who lose deposits tend to do so because of a misunderstanding of the rules, or for failing to hold up their end of the deal.

Most auction websites, including Fannie Mae's HomePath, sell their homes in As-Is condition, meaning you generally cannot renegotiate on price if you discover a defect or find something terribly wrong with the house.

Your first step is to establish an account at the website, which could include providing your credit card number for the earnest money deposit. Determine whether you can obtain financing, as most auction sites allow financing, and speak with a lender prior to placing a bid to make sure you can qualify for a loan.

On some auction websites, you can watch the bidding take place. An initial bid will begin the process. There might be minimum requirements regarding the amount of a subsequent bid, known as incremental bids.

If the increment is set at $10,000, and the first bid is $100,000, this means the second and subsequent bids must be increased by at least $10,000. So, a second offer of $100,001 will not be accepted. Under this scenario, the second bid must be at least $110,000, with a third bid set at $120,000, and so forth.

Short Sale Auctions

If the auction home is a short sale, the seller might have already accepted an offer and now awaits bank approval. The bank, in turn, might instead elect to place the home for auction to try to obtain a higher offer.

This type of auction is permissible by the bank because the bank is entitled to the highest price possible and, in a short sale, the bank sets the rules, even though the bank does not own the home. Some websites such as Auction.com require that buyers pay a 5% premium on top of the sale price, which is how short sales can sell at a price that exceeds market value.

For this reason, the buyer who signed the original sales contract can sometimes win the home without bidding. You might ask your agent to find out through the Multiple Listing Service (MLS)  if a buyer is already under contract.