When searching for an investment property online, you may find the perfect home with small print saying the sale is subject to an online auction. Immediately, questions arise. What does it mean to buy properties through online real estate auctions? Do I need to pay cash for the house? How does online bidding work? Well, it’s actually not as complicated as first-time buyers may think. If you’re thinking of buying a property through online real estate auctions, keep reading. In this blog post, we answer the above questions and teach you everything you need to know about online house auctions to increase your chances of winning.
What Is an Online Property Auction?
As the name suggests, this is where you can find a range of properties online offered for sale at different price points. The auction will either happen in real-time like a live auction or span over the course of days or weeks. Contrary to popular belief, not every home that you’ll find at online real estate auctions is a foreclosure. Some are short sales and bank-owned homes. Furthermore, while many homes found at auctions are distressed properties, not every home fits that category.
If you find a property and you wish to buy it, you’ll have to place a bid via the web and compete against other bidders. So, how does an online real estate auction work exactly?
#1. Find an Online House Auction Site
The first thing you should do is, of course, find online real estate auction sites. There are several websites that offer online auctions which you can browse to see what type of real estate properties they’re selling, how much they cost, and the auction requirements. Some of the best-known sources for buying auctioned homes online include:
Once you start searching for an investment property to bid on, make sure you read the listing or fine print. It contains information like the property’s type, size, what the deposit is, starting bid, date of the auction, registration requirements, contingencies (like an appraisal contingency), and the type of financing required to close on the property (i.e. whether you’re allowed to have a mortgage or can only buy with cash). It’s important that you read this to make sure you understand all the rules that are disclosed and that you can actually bid on your target property.
An important thing to keep in mind is that some sites start online real estate auctions with something called a “Homeowner Round.” This is very common for Fannie Mae auctioned homes, and it means you can bid on the auctioned home only if you’re going to live there yourself. If you win the bid, you’ll have to sign a disclaimer that says you’re going to do so. As a real estate investor, you can work around this by calling the listing agent of that property and asking him/her to submit your offer as soon as the property goes into the investor round. This way, your offer will be the first one if the auctioned home becomes available to investors.
#2. Register for the Real Estate Auction
In order to actually bid on any of the properties, you’ll have to register for the auction. Some sites will show you details about available properties only after you’ve registered. Part of the registration process typically requires bidders to place a deposit (5-10%) as proof of sufficient funds. You can choose to pay this deposit by cash, certified check, or credit card. Once you do that, the website will ask you whether or not you’re currently being represented by a real estate agent. Now, that’s crucial because even though it’s an online home auction, you will pay a commission. How much? This mainly depends on the house but at the very least, you’ll probably pay about 1% of the purchase price in the form of closing costs (more on fees associated with online real estate auctions below).
Typically, agents and realtors are not involved in online home auctions, but if you are represented by one, you’ll be required to put in the agent’s information like company name, broker name, and licensing number. Keep in mind that for some online auction sites this could be a two-part process. What this means is that in order to be valid, your real estate agent then has to actually log on and register you, the buyer.
#3. Provide Your Credit Card Number
Once you register, the online real estate auction site will then request your credit card number. This single aspect is what makes many buyers very leery about online house auctions. Many would say “why should I give my credit card number? I’m not sure I feel very comfortable with that.” But there’s a reason why online auction sites ask for this. Basically, when you’re looking at an auctioned investment property that you’d like to bid on, the three main things that you’ll see are:
- When the auction starts
- When the auction ends
- What the current bid is
Needless to say, you’ll know exactly when and where you need to be to bid on the property. But, what happens if you win the bid and then back out? There needs to be some accountability or a way to “hold the buyer’s feet to the fire.” Anyone can just place in a bid amount but without any accountability or penalty for backing out, there’s really no way to know how valid the bid is. So, sites that handle online real estate auctions request your credit card number and a deposit for identity verification purposes only. There’s no need to worry because they won’t charge you if you don’t win the auction. The only way you will be charged is if you are the highest bidder and you do not perform – meaning you decide that you don’t want to buy the property anymore. In this case, the online home auction site will keep your deposit and relist the house.
#4. Bid for a Home Online
The main question beginner real estate investors want an answer to is how to bid on an online auctioned home. Here’s a simple breakdown of how bidding on real estate properties works. The first thing you should know is that the online bid price is not necessarily the sales price that you’ll pay. Many auction websites will post the estimated market value, but will offer a lower price to attract real estate investors’ attention. Typically, the bidding price is 50% to 75% of the amount the seller actually hopes to receive. It’s the starting point of online real estate auctions and will move up as buyers start to place their bids.
On auction day, log into your account, navigate to the investment property or properties for which you’ve registered, and verify the auction details. An initial bid will begin the process and, on some online real estate auction sites, you can watch the bidding take place. There might be minimum requirements regarding the amount of the following bid known as “incremental bids.” For example, if the incremental is set at $10,000, this means if the first bid is $100,000, the second must be increased by at least $10,000. In this case, the second bid must be at least $110,000, the third bid $120,000, and so forth. For real-time online real estate auctions, each bid resets the countdown clock a few minutes to give time for the next bid, until the bidding stops.
What Happens When You Win a House Auction?
According to Auction.com, you should get your deposits back within a week if you didn’t win the auction. On the other hand, if you were the highest bidder, one of three things could happen depending on which type of auction the site falls into:
- Absolute Auction: This is when the highest bidder wins the property, even if that amount is significantly less than the value of the home. This means you’ll get yourself an investment property if you were the highest bidder regardless of the bid amount.
- Reserve Auction: In this type of online property auction, owners set a reserve as the minimum amount they’ll accept to sell. So, if you were the highest bidder but your price did not reach that reserve, the seller can reject your offer.
- Minimum Bid Auction: This type is similar to a Reserve Auction, except that the seller sets a minimum dollar amount for the bidding to start at. In the end, the seller will only accept the published minimum price and the highest bidder wins.
In all cases, once you win the bid, you’ll need to sign the purchase contract and wire your deposit within 24 hours. At this point, your closing representatives will assist you in finalizing the transaction through the standard escrow and title process. The length of the closing process may vary, but once it’s over, congratulations! You’re now a proud winner and new owner of an investment property and you’ve successfully entered the world of online real estate auctions.
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5 Tips for Winning an Online House Auction
Winning a real estate auction (whether live or online) is not just about placing the highest bid. You might win the property, but will you win the auction in terms of scoring the best deal out there for real estate investing? Here are 5 tips that beginner real estate investors should keep in mind to successfully buy a house at an online property auction:
1. Have an Investment Strategy in Mind
Savvy investors know exactly what they want to achieve before going into an auction. This helps them buy the right property that meets their investment goals. For example, are you thinking of buying an auctioned home to hold, flip, or rent out? Are you looking to buy a single property that is a bit expensive or multiple cheap properties? Do you want your new investment property to be nearby or are you comfortable with out-of-state real estate investing? Having an investment strategy and clear goals in advance will increase your likelihood of winning the auction.
2. Know Your Budget and Stick to It
It’s easy to get caught up in the frenzy of bidding on properties at online real estate auctions. Successful winners of property auctions, however, are those who bid with a maximum budget in mind and stop when the price gets too high. If you’re caught up in a bidding war, you might accidentally overspend on the home you wish to buy. On the other hand, sticking to a budget will save you a lot of money (and heartache) over the long-term.
Fees Associated With Online House Auctions
When preparing your budget for buying an investment property at an online auction, there are a number of fees to account for. Some people will turn up and buy a property without reading the requirements only to find that there are additional fees they need to pay. Be smart and carefully read the listing or fine print where auction sites typically detail their fees and how much they cost. The most common costs associated with online real estate auctions are:
- Buyer’s Premium: The auction site charges this fee for conducting the auction. It varies depending on the site – it’s commonly around 10% of the final purchase price of the property, but it can be a flat fee of $1,000 or more.
- Earnest Money: As mentioned, most sites require 5%-10% of the winning bid as a deposit or earnest money.
- Transfer Fees: These fees can be $1,000 a more, depending on the site.
- Additional Miscellaneous Fees: You could also be responsible for commissions, closing costs, tax liens, or other expenses at the time of closing.
Side note: If you’re planning to buy a distressed auctioned home to fix and flip, be sure to also budget for holding costs and the cost of repairing and renovating the investment property!
3. Do Your Homework and Due Diligence
While you can make the purchase without leaving the comfort of your home, you should not cut corners! Real estate investors should do as much due diligence as possible in advance. It’s common for online real estate auction sites to sell their properties as is and with no contingencies, meaning you can’t renegotiate the price if you discover something wrong with the house. So, make sure to find out whatever you can about the property’s condition, do a title search, and check the neighborhood and local real estate market as well.
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4. Have Your Financing in Place
Another way to increase your likelihood of winning online real estate auctions is by buying with cash. As an all-cash buyer, you won’t subject your offer to lender requirements and this will help facilitate a quick transaction. Some sites allow for bank financing, but you’ll need to provide proof of funds and entity documents besides the earnest money (deposit). So, if you’re going with this type of financing, make sure to get a pre-approval letter and speak with a lender before placing a bid to make sure that you can qualify for a loan.
The Bottom Line
Buying an investment property through an auction is a unique way to invest in real estate. Technology has made this option even easier and more efficient for real estate investors by allowing them to find and buy auctioned homes online. In this blog post, we’ve covered everything that beginners need to know about how online home auctions work, the fees associated with them, and how to increase your chances of winning. If you have any other questions, don’t hesitate to leave them in the comment below.
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