In an online auction, you won’t find yourself standing on the steps of the county courthouse or packed into a hotel ballroom. You could be anywhere when you bid—at home, the office, even an airport—as long as you have an Internet connection. Bidding can occur 24 hours a day over the course of days or weeks, instead of on a single day.
Online auctions also broaden the types of properties you can bid on: short sales, non-distressed, bank-owned homes (known as REOs), and commercial property and notes. The steps for bidding in an online auction are similar to a live auction.
FIND A PROPERTY YOU LOVE
With online auctions, you can search for and bid on properties all over the country. You can even bid on multiple properties at once.
DO YOUR DUE DILIGENCE
Many online auction sites provide a wealth of information on the property page, including maps, estimated resale value and any liens. Be sure you read it all! It’s also a good idea to conduct your own due diligence, including a title search, and seek independent advice from a real estate agent or broker, a real estate attorney, or another experienced investor. Unlike live foreclosure sales, most homes sold in online auctions do have an agent commission (called “broker co-op” in the business), which allows a real estate agent to get paid for their services.
As with foreclosures, visit the property if you’re local. The real estate agent may even offer open houses; if so, bring your contractor with you to help you assess what repairs might be needed.
REGISTER FOR THE AUCTION
Most online auctions require you to register and submit a refundable deposit in the form of a credit card authorization. This simple process ensures that all bidders are serious and motivated. (Don’t worry—you’ll get the deposit back if you’re not the winning bidder.)
PREPARE YOUR FINANCING
To expedite the close if you win, start gathering the following documents before the auction:
- Proof of funds or financing information. Although most online auction sites don’t provide financing, Auction.com has a large—and growing—number of homes with financing available.
- Entity documents if you’re bidding under a company name or entity such as an LLC, trust or limited partnership.
- An earnest money deposit, which is usually 5% of the total purchase price and due one business day after the auction ends.
AND IF YOU’RE THE WINNER?
Be ready for things to move fast. With Auction.com, for example, the contracting department will contact you within two hours and walk you through the online purchase and sale agreement, which shows the total purchase price and the timeline for submitting documents and payments. Make sure that escrow receives your documents and payments on time; otherwise, you could lose your earnest money deposit.
Look closely at the property page for each property you are planning to bid on. Many properties have what’s called a “buyer’s premium,” which is the fee charged by the auction company for conducting the sale, from marketing through the closing. The amount can vary, but it’s usually 5% of the winning bid amount. Many properties don’t have a buyer’s premium because the bank or seller has arranged to pay this fee out of their proceeds from the sale.
TITLE INSURANCE
It’s a good idea to purchase title insurance. Here’s why: The properties in an online auction often have quitclaim or special warranty deeds that will transfer the bank’s interest in the property to you at closing. The problem is that any undiscovered liens will transfer to you as well! Title insurance protects you from these risks. For some homes, you can buy title insurance through escrow; for others, you can buy it after closing.
Occasionally, you’ll receive clear and marketable title to the property at closing. It depends on where the home is in the foreclosure process. This is another reason why a knowledgeable real estate agent or attorney can provide a valuable service to you.
Buying real estate at auction can be a lucrative—and fun—way to start or enhance your investing career. It can also mean years of heartache for the uninformed, so take advantage of all the resources available to make sure you know what you’re getting into.