Online house auctions: What are they and how do they work?

As virtual showings have become more common in the real estate industry, so have online home auctions.

Whether you’re interested in learning more about investing in real estate or are a new home buyer, online auctions are one way to expand your home buying universe.      

However, you should be aware of certain risks associated with online auctions before you place a bid. Let’s explore what online auctions are, navigate the process of online auctions and consider their rewards and potential drawbacks.

What are online house auctions?

Property sold and bought at auction can be there for various reasons, and the auctions frequently happen online, with all bidding conducted over the internet.

When you participate in an online auction, you view images of properties on an auction website and make bids from the comfort of your couch.

Auctions sometimes happen on government-operated sites, where you can find foreclosed homes.

Why is real estate sold in online auctions?

Homes are sold at auction for many reasons, and the property’s seller can be a homeowner, a lender or a local or federalgovernment agency. For instance, a government agency may seize a property if the owner fails to pay property taxes. In other cases, a lender may reclaim a property through foreclosure because the borrower stopped making monthlymortgage payments.

In these situations (and others involving ownership changes), the home gets sold at auction. Let’s look at some commonreasons homes are sold through online auctions.

Sell an as-is property quickly

A homeowner who wants to sell their property as is may sell it at auction. Listing a home on an auction site and selling it to the highest bidder is usually faster than listing the house on the market and waiting for a qualified buyer. Sellers increase their chances of a quick sale by selling their homes through online auctions.

Some online auction sites feature luxury homes that cost between $2 million and $40 million. The owners usually want to move quickly and don’t want to show their homes. However, as-is properties in online auctions typically require a significant number of repairs or improvements.

Mortgage default

If a borrower stops making their monthly mortgage payments, the mortgage will eventually default. A mortgage default can lead to a foreclosure, and a bank may sell the property through an online foreclosure auction.

Unpaid property taxes

Failing to pay property taxes can also lead to foreclosure. In that case, local municipalities typically sell these properties at auction, either a local auction or through the Treasury Department’s auction site.

Criminality

Most states have criminal forfeiture laws that authorize the government to seize properties associated with criminality.Forfeited properties seized by the Justice Department are available for sale through 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.

Less inventory

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?

Real estate investors are usually the ones buying properties through online auctions and have experience navigating the common problems associated with online auctions.

Before you dive into the world of online house auctions, you should know their potential challenges and how to navigate them effectively.

You’ll buy as is

When you buy a home as is, you’re responsible for fixing any defects or issues with the home. With an online auction, you likely won’t get a chance to have the home inspected before you place a bid.

Consider the potential consequences of skipping a home inspection before you buy a home at an online auction and pad your budget to cover future repairs.

You’ll need cash

A motivated buyer can find great deals at online auctions, but most deals require purchasing the home with cash. Since these homes are usually heavily discounted and sold as-is, cash is the fastest way to transfer ownership to a new buyer.

You may need to evict the previous homeowner

The previous homeowner(s) may still be in the home. If that’s the case, you’ll be responsible for taking legal action to evict them from the premises. If you can, visit the property and inspect the home from the outside to look for signs that the previous homeowner may have already moved out.

You’ll compete against experienced real estate investors

Online house auctions are open to all types of buyers. However, you’ll likely find yourself bidding against seasoned real estate investors at some point.

To get a sense of how investors work, it may be helpful to watch a few online auctions before participating in one.

You might encounter redemption laws

If the property is in a state that grants the right of redemption, homeowners may be able to repurchase their property even after its sale at auction. They can reclaim their home up to 7 months after the sale by paying what they owe on their mortgage or property taxes. If a homeowner exercises the right of redemption, the lender will compensate the buyer fortheir losses.

What are the benefits of buying a home through an online auction?

Let’s look at some of the most significant benefits of purchasing a home through an online auction.

You may get a bargain

Many investors like auctions because they can find houses for bargain basement prices. Fixing a distressed property isn’t typically a problem for buyers with experience in making home repairs, especially if they purchased the property to fix it and flip it for a profit.

You can close faster

Many people like online house auctions because they move quickly. There are no lenders, contingencies or inspections to deal with, and buyers can avoid a lengthy underwriting and closing process.

You can learn from experienced investors

Even if you decide you’re not ready to buy, attending an online auction and observing experienced investors is a valuable way to gain the experience and confidence you’ll need to participate in an auction when you’re ready.

What are the differences between online and in-person real estate auctions?

Online house auctions are typically much less intimidating for first-time buyers than in-person auctions.

In-person auctions move quickly. Participants are expected to understand how it all works from the get-go. Online auctions move at a more manageable pace that allows potential buyers time to familiarize themselves with an auction house’s rules and procedures.

Can you refinance the auctioned property after you buy it?

Delayed financing is the only way to refinance homes purchased at auction, allowing borrowers to pay cash for a home and refinance the property the next day. You can use the cash you extract from the refinance to pay for repairs or other needs.

The bottom line: Online house auctions can be a risky investment

Many people like online home auctions because of the chance to buy a property at a steep discount. But you likely won’t be able to inspect the home before buying it, and buying a home that hasn’t been inspected is risky, even for experienced investors.

Your best defense is preparation. If you plan to buy a home through an online house auction, create a realistic budget for the upfront costs of repairs and generously pad the result before moving forward.

If you’re interested in buying a home in the next year, you should learn more about programs designed to assist prospective homeowners.