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.

How can I find online auctions to buy cheap houses?

There are a variety of options when it comes to finding online auctions for houses. However, despite the temptation to search on social media or online forums, it’s best to stick with reputable websites. Here are some of your safer options.

County and state websites

Auctions sometimes happen on government-operated sites, where you can find foreclosed homes. For example, the USDA-RD/FSA (United States Department of Agriculture – Rural Development and Farm Service Agency) resales web site offers such properties, while the IRS (Internal Revenue Service) will occasionally offer houses and business offices for auction.

Some states and counties offer their own auction sites for foreclosed properties.

Auction websites

There are a number of auction sites available that specialize in home sales, such as Auction.com or Equator.com. There is also Homepath.com, owned by the Federal National Mortgage Association (Fannie Mae), and Homesteps.com, owned by Federal Home Loan Mortgage Corporation (Freddie Mac).

Bank-owned property auctions

Some banks, such as the Bank of America or Regions bank, have foreclosed homes up for auction. Simply search for the name of the bank and “foreclosures” or “properties for sale” to see if a particular bank offers these.

How much does it cost to buy through an online house auction?

Online auction sites make money by charging fees for their services. Before you bid on a property, you should carefully review the schedule of fees listed on the site.

We’ve collected a sampling of the fees you may encounter and their costs. Your total cost will depend on the online auction site you use.

• Buyer's premium: 5% – 10% of the home sale price or a $1,000 flat fee or more
• Transfer fees: $1,000 or more
• Auction service fee: $3,000 or more
• Technology fee: $200 – $500
• Bidding deposit: This is a form of earnest money that’s applied to a winning bid. The buyer forfeits the deposit if they fail to pay the property’s entire purchase price within the auction’s time frame, usually 24 hours.

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 federal government 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 monthly mortgage payments.

In these situations (and others involving ownership changes), the home gets sold at auction. Let’s look at some common reasons 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.

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. The process for when a homeowner exercises the right of redemption will depend on the investor and the state the home is in.

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.

1. 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.

2. 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.

3. 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.

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.