Online real estate auctions are growing in popularity, and not just among investors looking for distressed properties or commercial assets. As the flood of post-housing-crisis foreclosures slows to a trickle, online real estate auctions are gaining more traction among homebuyers looking to purchase a primary residence, too. That may mean more competition, so how do you maximize your chances of winning on auction day?
Before the Auction
If you’re interested in buying property at an online auction, some of the most important steps you should take happen before auction day. Laying the groundwork increases your chances of winning an auction.
Have an investment strategy. Make sure that you know what you want to achieve going into the auction. What’s your intention in buying real estate? Are you looking to buy a single-family residence, townhome or condo to rent out as a steady source of income (also called “buy and hold”)? Or do you want to “flip” the home for a profit? Have a clear goal.
Line up your funding. If you win the auction, how are you going to pay for the property? Many auction sites don’t provide financing, meaning that you’ll have to pay the entire amount in cash. You may need to provide proof of funds, entity documents and an earnest money deposit. Most sites also charge fees, sometimes called a buyer’s premium.
If you need to finance your purchase, check your credit report. Most lenders today require 700 or better FICO scores from borrowers who want to buy investment property. Also, make sure that your total debt-to-monthly-income ratio is low. Pay down outstanding credit card debt or car loans to improve your debt ratios.
Create an account on the site. This allows you to track properties that meet your criteria—and it’s one less thing to do on auction day.
Do your due diligence. This is one of the most critical parts in any real estate transaction, especially if you’re considering a foreclosure, bank-owned property or short sale. Don’t cut corners! Key tasks include:
- Review the title. Always get a preliminary title report on any foreclosed property you’re interested in buying to find out who owns the title and whether you have the right to purchase it. Look for any secondary liens or tax liens. Make sure there aren’t any hidden liens or encumbrances on the property that will blossom into unpleasant surprises later. In most online auctions, the seller (the bank or financial institution) will have cleared the liens on a bank-owned property, but in some auctions, the bank may make any and all liens the buyer’s responsibility. In these auctions, the bank or financial institution will offer a quitclaim deed where they sell their interest in the property to you “as is,” although many of these sellers will also offer a special warranty deed if you buy title insurance.
“Know what you’re bidding on!” counsels Mike Jansta, Auction.com’s Senior Vice President of Marketing. “You should always consider buying title insurance.”
- Inspect the property thoroughly. If you’re local, visit the property. You may not be able to get inside a foreclosure property that’s still occupied, but if you can, have a licensed professional inspector review the house for evidence of structural defects, water damage or other major problems. If you can’t get inside, drive by the property to check out it and the neighborhood. And if you’re not local, you might be able to ask a contractor to drive by the house to evaluate it.
For the properties listed on Auction.com, once you have an account and find a property you’re interested in, you can access due diligence documents right on the property’s detail page. Be sure you’ve read and understand all of these documents before the auction.
Get advice from a real estate expert. Work with a real estate agent, broker or Realtor® who has experience with online auctions. He or she will have the most expertise in assisting you through the process, including the title review. You should be aware that many properties don’t offer an agent commission, officially called the “broker co-op.”
“Be prepared to pay a commission to your licensed agent or negotiate some other agreement with them for their professional services,” says Jansta, “such as awarding them listing agent status when you’re ready to flip the home!”
Register for the auction. Once you’ve done your research and lined up your funding, you’ll need to register for each property in which you’re interested. A deposit may be required; this ensures that bidders are serious. At Auction.com, the bidder’s deposit requires a credit card authorization (not a charge) that we release after the end of the auction. Make sure you receive confirmation from the site that your registration is complete. Then mark your calendar for auction day!
During the Auction
On auction day, log in to your account and navigate to the property or properties for which you’ve registered. Verify the auction details on the property page and confirm the next bid as your bid amount.
At Auction.com, we’ve found that bidders have many different bidding strategies. For instance, some bidders like to place a Pre-Auction Bid before live bidding starts to see if the seller will accept their offer before the auction begins at all. Others wait for the pre-auction bid window to end to place a proxy bid prior to live bidding so Auction.com will do their bidding for them.
“However, the majority of bidders participate in the live auction window,” Jansta says. “They either place their highest and best bid early on to scare off other bidders or they wait until the very end and hope other investors aren’t watching the time run out.”
While all auction sites are a little different, a key tip to know in advance at Auction.com is that a bid placed in the final seconds will add time to the clock, usually a minute or two, to ensure that all bidders can place their final bids—just like a live auction.
Know what you’re willing to bid on a specific property based on your investment goal. As the auction progresses, set the maximum amount that you’re willing to pay—and stick to it. Don’t get caught up in “auction fever” and bid more than you intend, or get caught up in a bidding war just because you want to beat the other bidder. Keep your cool.
Try not to get emotional as the auction draws to its close.
After the Auction
If you aren’t the highest bidder, you should get your deposits back within a week.
If you are the highest bidder, don’t start celebrating yet. Depending on the site, three different things can happen:
- If the bid falls below a seller’s reserve, the property won’t be sold.
- If the highest bid is close to the reserve, some sellers will review bids for a possible sale. Occasionally, sellers require additional review even if the reserve has been met.
- If the highest bid is above reserve and no additional review is required, then you win the right to buy the property at that price!
Now that you’ve won the auction, you’ll need to sign the purchase contract, wire your earnest money deposit, and provide proof of funds. Your bid deposit will be automatically released.
At this point, a representative from the auction site will assist you in finalizing the transaction through the standard escrow and title process. The length of the close may vary, but when it’s over, congratulations! You’re the proud new owner of an investment property—and you’ve successfully entered the modern world of online real estate auctions.