Online real estate auctions offer something in-person auctions don’t: convenience. But is it better to join an online auction rather than a traditional one? We can help you answer by discussing the pros and cons of online auctions and how they work.
Online Real Estate Auctions: Is It a Good Idea?
How Does Property Sell at an Online Real Estate Auction?
An auctioneer conducts both in-person and online auctions. The main difference is that an online auction takes place entirely on the internet. Some people assume that property at auctions ends up for sale under foreclosure or legal seizure. But, the property can be under sale at an online auction in many ways.
1. Bank-Owned Home and Investor-Owned Home
Some homes sell as REO (Real Estate Owned), which means a lender or a bank owns them since they failed to sell in a foreclosure auction. Banks list these properties online, which are sold “as-is” and are often in disrepair.
Investor-Owned homes are properties bought by investors. They use resale as a method for earning a return on their investment. “The primary purpose of investment homes is not to live there as a primary residency but to create an income.
2. Flipped Home
Another type of investment is home-flipping. This means the real estate investors buy a property, then fix up and sell it to other buyers at a higher price for profit. Online auctions are ideal events for these reversed plans.
Some might think home-flipping is only for investment corporations or big banks, but small entrepreneurs can give it a go. Some are even investing and living in a house at the same time. Once it’s ready to sell, they will move out, get turnover and start a new project.
3. Short Sales
Short sales take place when the owners sell properties for less than the value of their mortgage loan. In this case, the seller has already accepted an offer and is now waiting for bank approval. Meanwhile, the bank uses auction websites once the property has been listed as a short sale.
The lender in a short sale, typically the bank, has the control right and is entitled to the possible highest price despite not owning the house. Some buyers even win the short sales without bidding. But, it’s important to calculate costs and make sure you will earn a profit when reselling the house.
Advantages and Disadvantages of Online Real Estate Auctions
Online auctions are convenient and easily accessible, but this kind of method has its own set of positives and negatives. First, speaking of advantages, there is a variety of them:
- Quick and easy
- No crowds
- No travel expenses
- Lower transaction fees
- A great range of selection
Besides those benefits, online auctions also have a few risks you need to consider:
- Unclear inspection due to misleading pictures/ information
- Website downtime
- Hacker attacks
- Payment risks
- Higher competition
How Do Online Real Estate Auctions Work?
When you are ready to join an online auction, create an account at the auction website. It’s necessary to provide detailed personal information, including a credit card number. This is important to have since it can be transferred to any specific documents once you win a bid at an auction.
Remember that auction houses also charge a “buyer’s premium” fee, roughly 5% of the winning bid. Sometimes large auction houses charge more, maybe one-quarter of the hammer price. So, make sure to read the terms & conditions of an auction house and get your auction budget prepared.
2. The Opening Bid
The opening bid or starting bid is the amount suggested online by an auctioneer to start a bid. If no bidders accept the suggested amount, the auctioneer must lower the opening bid until it is approved. The bidding price might vary around 50% to 75% of the amount the seller hopes to receive. Like traditional auctions, online auctions begin at a bid price and move up until the highest bid is offered.
3. Market Value
Market value is the price a property is now selling for in the current marketplace. For example, if you go to a store and look at a packaged snack, there is a price tag on it indicating its market value.
The market value will be available on the auction websites for buyers to examine comparable sales. When you are considering buying a home, you can compare sales to similar homes throughout the entire market.
4. Incremental Bid
An incremental bid is a rule on the amount of the following bid. For instance, if the starting bid is $100,000 and the increment is $5000, the successive bids must increase at least $5000 each time. This means if a buyer offers $100,001 at the second bid, it is unaccepted.
5. Reserve Price
Reserve price is the lowest price that a seller is willing to accept as the winning bid. Sellers are not required to reveal the reserve price at the online auctions. If the reserve price is not reached, the seller is not required to sell, even to the bidder offering the highest price.
Here is an example. A seller is selling a home worth $500,000 with an opening bid of $100,000. The undisclosed reserve price is $400,000. One buyer bids $200,000. Another buyer raises the bid to $250,000. Then, they continue to raise the bids, but no bid reaches the reserve price. In this case, this home will not sell to any bidders if the highest bid is still lower than $400,000.
6. Earnest Money Deposit
Earnest money deposit is an initial deposit that buyers make after they sign the sale contract. According to the agreement, buyers may lose their earnest money if there are any delays or cancellations.
It is worth noting that many online auctions sell properties “as-is,” meaning buyers accept the deal no matter how the home’s condition is. So, buyers are unable to renegotiate, regardless of any unexpected flaws.
One more notice is that once you win a bid, you will receive formal documentation, which can be launched online as well.
Online real estate auctions now have become more popular, especially in the current COVID-19 world. Once you better understand how they work, online auctions can offer successful trading with huge benefits and the least estimated risks. With great auction experience, buyers and sellers can decide which platform is the best for them and enjoy good sales.
Interested in online real estate auctions? Wiggins Auctioneers are here to help and provide you with huge online auctions. We have decades of experience in successful auctions. Contact us today.