Online House Auctions: What They Are And How They Work
Jamie Johnson7-minute read
February 23, 2023
As virtual showings have become more common in the real estate industry, so have online home auctions. An online auction is similar to a traditional auction, but instead of bidding on a home in person, you can do it from the comfort of your own home.
Whether you’re interested in learning more about investing in real estate or are a new home buyer who feels frustrated by the current housing market, online property auctions can be a great solution. Online auctions are a great way to expand your options and possibly find a home at a discount.
What Are Online House Auctions?
Property is sold and bought at auction for a variety of reasons, and these auctions frequently occur online. In an online auction, all the biddings are conducted over the Internet.
When you participate in an online auction, you can view images of the property and make bids from the comfort of your couch. These are usually conducted through auction websites.
Auctions will also sometimes take place on government-operated sites, where foreclosed homes are sold.
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Why Is Real Estate Sold In Online Auctions?
Homes are sold at auction for a variety of reasons, and the sellers can be homeowners, lenders, municipalities or even the U.S. government. For instance, the government sometimes seizes properties for failure to pay property tax, and homes can sometimes be foreclosed on for a borrower’s failure to make their mortgage payments.
When this happens, the home is sold at auction. Let’s look at some of the most common reasons homes are sold at online auctions.
Desire To Sell Quickly As-Is
If a homeowner wants to sell their property as-is, they may choose to sell it at auction. Listing the home on an auction site and selling it to the highest bidder is usually faster than listing the house on the market.
Some sites feature luxury homes that cost between $2 million – $40 million. These owners usually want to move quickly and without showing their homes. However, the properties sold as-is in online auctions are much more likely to be homes that are in worse condition and require a significant amount of repairs or improvements to be made. By putting these homes up for auction, the seller increases their chances of selling quickly to aspiring house flippers who search for properties to flip at auction rather than waiting for a buyer who’s willing to take a risk on a fixer-upper through the traditional real estate market.
If a borrower stops making their monthly mortgage payments, the mortgage will eventually go into default. Mortgage defaults lead to foreclosures, and the bank might subsequently offer the distressed properties for sale through online foreclosure auctions.
Unpaid Property Taxes
In addition to mortgage default, properties can be foreclosed on for failure to pay property taxes. If that happens, municipalities will often sell these properties at auction.
Most states in the U.S. have criminal forfeiture laws that authorize the government to seize any property associated with criminality or unpaid income taxes. The U.S. Treasury Department then offers that property for sale on its auction site while the Justice Department’s forfeitures are offered for sale on the General Services Administration website.
Have Online Home Auctions Changed During The Pandemic?
Before COVID-19, auctions were typically in-person events. Online auctions existed, but they weren’t as commonplace as they are now.
But once the pandemic hit, social distancing rules made in-person auctions impossible. As a result, online auctions and buying homes online as a whole have become increasingly popular over the last few years. Let’s look at two of the main reasons for why that’s the case.
Bigger Pool Of Buyers
Conducting virtual auctions has opened up the market to a much larger audience. This means sellers can often charge higher prices for auctioned-off properties.
The COVID-19 foreclosure moratorium greatly reduced the inventory of available foreclosed properties. As a result, fewer homes are available on the market, but the demand for real estate continues to increase. Some people have turned to online auctions as an alternative option for purchasing a home.
What Are The Risks Of Buying A Home Through An Online Real Estate Auction?
There are many advantages of online home auctions, but there are risks to consider as well. Online auctions are usually navigated by real estate investors, who have experience with some of the common problems of online auctions. If you’re considering buying a home to live in or an investment property of your own through an online auction, you should proceed with caution.
You’ll Be Buying As-Is
When you buy a home as-is, that means you’re responsible for the home and any unexpected problems that come with it. And when you participate in an online auction, it’s unlikely that you’ll get a chance to perform any type of home inspection first.
If you find a deal that you just can’t pass up, you should try to perform an exterior inspection of the home if possible. It’s also a good idea to make sure the property is no longer occupied before bidding.
You’ll Have To Have Cash
There are great deals to be found at online auctions, but most of these are paid out in cash. When you buy a house with cash – whether it’s at auction or through the traditional housing market – you won’t be working with a mortgage lender to help finance the purchase, so you’ll need to be prepared with a substantial amount of money upfront in order to purchase the property. At cash-only online auctions, cash is also required in order to get the property appraised.
You May Have To Evict The Previous Homeowners
In some cases, the previous homeowners may still be living in the home you successfully bid on. If that’s the case, you’ll be responsible for evicting them from the premises. It’s a good idea to do an exterior inspection before bidding on a home to ensure the previous homeowners are already gone.
You’ll Be Competing Against Experienced Real Estate Investors
Auctions have traditionally been the domain of real estate investors, but online auctions have opened auctions to all types of buyers. However, you’ll likely find yourself bidding against these investors at some point.
For that reason, it can be helpful to watch a few online auctions before participating in one yourself. This will give you an opportunity to learn how they work.
You Might Encounter The Bitter Sting Of Redemption Laws
If the property is located in a right of redemption state, homeowners may be able to reclaim their property even after the auction is over. By paying what they owe on their mortgage or property taxes even after the foreclosure sale, they can reclaim their home up to 7 months after the sale. If the right of redemption is exercised, the lender will compensate buyers for their losses.
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What Are The Potential Rewards Of Buying A Home Through An Online Real Estate Auction?
Let’s look at some of the biggest benefits of participating in an online auction.
You Might Get An Upfront Bargain
Many investors like auctions because they offer a real opportunity to find bargains that aren’t available in the conventional real estate market. However, these investors are often contractors or tradespeople who know how to fix even the most severe home problems. And in an online auction, there’s no experienced real estate agent there to guide and warn you about potential issues.
You’ll Be Able To Close Quickly
Many people like online auctions because they move quickly, and it’s a much faster way to close on a home. There are no lenders, no contingencies to protect buyers and no inspections.
You’ll Learn From Experienced Investors
Even if you decide you aren’t ready to buy yet, going to an online auction will educate newcomers and allow them to observe experienced investors. This can give you the experience you need to participate in another auction down the road.
What Are The Differences Between Online And In-Person Real Estate Auctions?
For beginners, online house auctions are much less intimidating than in-person auctions. Some auction companies still run in-person events, but they have become less common due to COVID-19.
In-person auctions move quickly, and participants are expected to understand how it all works from the get-go. Most in-person auctions are conducted by auctioneers with an online presence, so readers should check for information about how to bid before they go. Online auctions, on the other hand, proceed more slowly. This gives potential buyers time to familiarize themselves with the auction house’s rules and procedures and to participate in the process more comfortably.
Can You Refinance The Auctioned Property After You Buy It?
When you buy a home at auction, delayed financing is the only way to refinance your home after the purchase has been finalized. This program allows borrowers to pay cash for a home, then begin the refinancing process the very next day. This allows you to extract some of the cash you used to pay for the home.
How Much Does It Cost To Buy Through An Online House Auction?
Online auction sites are usually compensated by charging fees for their services. Before you bid on anything, you should carefully review the information listed on the site.
This will help you understand what fees you’ll be charged. Online auction fees can include:
- Buyer's Premium: This usually costs between 5 – 10% of the final purchase price of the home, or a flat fee of $1,000 or more.
- Transfer Fees: This fee is generally $1,000 or more.
- Auction Service Fee: The fee can be $3,000 or more.
- Technology Fee: An additional fee for using online services, usually costing around $200 – $500.
- Bidding Deposit: A bidding deposit is a form of earnest money, and it’s applied to a bidder’s overall purchase price. However, this deposit is forfeited if the buyer fails to pay the full purchase price within the auction’s time frame, usually within 24 hours of the auction’s end.
The Bottom Line: Online House Auctions Can Be Risky, Even For The Most Experienced Investors
Many people like online home auctions because they provide an opportunity to buy property at steep discounts. However, even the most experienced investors have gotten burned due to a lack of inspection opportunities. If you’re determined to make your next home purchase through an online auction, make sure you’re prepared for the possibility of the property being in poor condition and requiring more funds beyond the upfront cash you provide in order to make the home a safe and comfortable place to live in.
If you’re interested in buying a home in the next year, you should learn more about programs designed to assist prospective homeowners.
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