Buying Real Estate at an Online Auction

Woman using tablet to look at houses for sale online
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Most house hunters don't initially set out to bid on a home through an online auction. They may be conducting online research or attending virtual viewings, but just as these online activities have become more mainstream in the real estate industry, online auctions have become more common as well. You may be searching for homes online when you come across the perfect listing, and there in the small print you discover that the sale is subject to an auction. Don't let it deter you.

Here are some reasons a house might be sold at auction, the breakdown of the auction itself, and what you'll need to know in order to participate.

Why Homes Are Sold at Online Auctions

You may be familiar with home auctions that happen in person, such as through a trustee's sale or a sheriff's sale; online home auctions contain similar elements, except the bidding is conducted completely on the internet. Contrary to popular opinion, not every home at auction is the result of a foreclosure or legal seizure. Homes can end up for sale at an online auction in many ways.

Bank-Owned Homes and Investor-Owned Homes

Some homes auctioned online are listed as "real estate owned" (REO), which means they are for sale by financial institutions. This typically happens after a foreclosure, when the bank seizes real estate back as collateral. Most of the homes are distressed sales, but not every home that is up for auction fits that category.

You can find websites where investors are unloading homes once purchased from banks, generally as a packaged deal of bundled homes, known as buying in bulk. The investors use auctions to obtain the highest offers for each house.

Flipped Homes

Investor-owned homes might be fixed up and ready to sell as flipped homes. Large scale investment pursuits, such as full housing developments, can be bought up in early stages, then remodeled and upgraded to sell for profit, either individually or in bulk. Individual homes are purchased as fixer-uppers, and then renovated and sold for profit. Online auctions are ideal for these quick-turnaround projects.

Real estate investing isn't limited to big banks and investment firms. Many small-time entrepreneurs engage in home-flipping as a side gig or full-time pursuit. Some even work on a house while living in it, and then literally move to the next project when it's ready to sell.

Short Sales

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.

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

The Auction Action

Once you find your dream home online and are ready to engage in bidding, your first step is to establish an account at the auction website. You'll need to provide accurate personal information, since it may be transferred to any legal documentation in the event that you win the auction. You'll also need to provide a credit card number for the earnest money deposit.

Most auction sites allow financing, so if you plan to take out a home loan, speak with a lender prior to joining an online auction to determine whether you qualify.

You should also familiarize yourself with any legal requirements and closing terms before casting an uninformed bid. In addition to earning commission from the seller, auction houses also charge a "buyer's premium" fee, usually about 5% of the winning bid, so this figure should be factored in to your auction budget.

Decoding Bidding at Online Auctions

On some auction websites you can watch the bidding take place in real time. The action can move fast, so if you want to participate competitively, you'll need a good understanding of the value of your target home in the current market, and how it's reflected in the bidding process.

The Opening Bid

The bid price stated online is meant to attract your attention. It is not necessarily the final sales price 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 far lower than what the seller will accept. The online auction will typically begin at the bid price and move up.

Market Value

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

Bid Requirements

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.

Reserve Price

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 won't be finalized until the reserve price is reached.

Going, Going, Sold

Once an offer is accepted, a contract between buyer and seller is formed. If you decide later to cancel, you risk losing the earnest money deposit. 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 sell their homes as-is, meaning you agree to accept the deal regardless of the home's condition. Unless there's an extreme or unconscionable violation on the part of the seller, you will not be able to renegotiate on price, regardless of any surprise defects you might discover.

If you cast the winning bid, you'll follow up with formal documentation, which can typically be initiated online as well.