Your Guide to Online Real Estate Auctions

By Peter Miller

Real estate auctions, long a staple of commercial real estate, are gaining popularity in the residential arena.

Auctions? Really?

It’s not much of a stretch to see that auctions will be part of real estate’s future. The technology is in place, and online auction services are being used more frequently as a way to both market and purchase residential properties.

“You have to embrace technology. You have to embrace the changes that are going to be happening in real estate,” explains Waldo Herrera with Realty World-Connect in Elk Grove, CA. “If you don't you're gonna be left behind.”

The new era for auctions

Auctions have a long and storied history — and some of the stories are perhaps less believable than others. Today, however, auctions are more mundane affairs involving cars, wine and even royal titles.

Go to a real estate auction, and you’ll find two types of sale arrangements:

• Properties offered on an absolute basis: This means that the highest bidder will get the property even if the bid is lower than lowball.
• Properties sold with a reserve or minimum bid: Here the seller — often a lender who is in control of the property — can accept or reject an offer that does not meet certain expectations.

Auctions allow buyers and sellers to negotiate in a way that avoids common bargaining headaches. With an auction the seller sets the terms, and buyers can then bid or not bid as they prefer. Because the terms of sale are the same for everyone the only variable is price — the willingness of one buyer to offer a higher bid than another.

Missing from this process are the disputes and disappointments that arise from home inspections, radon tests and appraisals. Homes are sold “as is/where is” with no contingencies. The seller gets a sale, and the buyer gets a house. For real estate brokers, auctions can eliminate massive piles of paperwork as well as lengthy – and sometimes difficult – negotiations.

Keys to success

The lack of point-by-point negotiations raises a number of issues:

• You should take every opportunity to physically examine the property, review related disclosures and adjust bids accordingly: With auctions what you see is what you get, so it pays to see as much as possible.
• Homes have a given value depending on factors such as location and condition: You should set limits on your spending and not get caught up in the bidding process.
• Bidders don't have a financial contingency: In a traditional real estate sale there is often a financial contingency:  If the borrower cannot get financing with the stated rates and terms, then the transaction cannot close and the purchaser will not be penalized with the loss of a deposit. However, with auctions a bidder is simply expected to have the ability to close the sale. Be certain you have sufficient cash or financing in hand when making a bid, including any buyer premiums and other costs. Financing is often available; however, you should line up loans well before the auction date to ensure you can close the deal.

Pre-auction bids

We usually think of auctions as instantaneous and immediate events — sales that are opened and closed in just a few minutes. In fact, it may be possible with some properties to make what is called a "pre-auction bid" and close the sale before the property comes to market.

With a pre-auction bid you make an offer and if the seller finds it satisfactory you have a deal. A pre-auction sale follows the usual rules of the auction process, meaning you’re buying a property “as is/where is” with no contingencies.

Post-auction sales

In some cases there are also post-auction transactions.

Imagine a situation where a seller, perhaps a lender, has set a reserve price that is not met, but you still like the property. In this situation title reverts back to the lender, and the property becomes what is called a REO, or "real estate owned" on the books of the lender.

Working through the auctioneer you could contact the lender and possibly purchase the property. Because the home did not meet the reserve price, the lender might now be willing to accept a lower offer rather than keep the property in its inventory with the associated costs for maintenance, security, insurance and taxes.

There’s little question that real estate auctions will be more common in the years to come. However, online real estate auctions are not just a future trend; they are here today and increasingly are used to market properties with speed, transparency and fewer headaches for everyone.

Related:

• Bidder’s Checklist: 5 Ways to Win Online Real Estate Auctions
• 5 Surprising Home Buyer Incentives
• 5 Common Misconceptions About Real Estate

Peter G. Miller is a nationally-syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as The Huffington Post and Auction.com. 

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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