real estate

Home auction sites have upsides, downsides

Steve McLindenDear Real Estate Adviser,
What can you tell me about online home auction businesses? They seem to offer an effective way to buy and sell. I see one of the major sites charges fees comparable to what an agent charges. What's the upside and downside to them?
-- Rick M.

Dear Rick
Thousands of homes are sold this way annually, so these businesses certainly serve a purpose. A great deal of the auctions in this "online" industry, I might point out, are actually held live at auction halls around the country with real auctioneers, though some sites seem to favor the online kind more.

While such sites attract buyers for various reasons, their core customers are typically motivated owners in financial straits who quickly want to sell their homes as is and are usually willing to accept a sum well below market price to do so. Among the more popular ones are Auction.com, AuctionResource.org and RealtyBid.com.

Each operation has a slightly different niche. Some sites feature mostly bank-held properties, while others might focus more on pre-foreclosure or short sales. Regardless, winning bidders will usually pay at least a 5 percent fee in the form of a buyer's premium. Agents for buyers and sellers, when used, also get paid. Additionally, site users are either required to buy monthly memberships or are charged one-time fees.

Buyers should be aware that many properties on these sites are still occupied by owners or renters. In many cases, that means there are no open-house periods, so you might be bidding and buying on homes with "all faults and limitations." That mean you might be flying blind without the opportunity for you or your inspector to give the house a full "physical." That's caveat emptor with a capital C.

Also be wary of liens and other encumbrances. You can search for them -- tax liens, contractor liens, etc. -- in city or country deed records, though litigation and other issues may not materialize there for a while. That's why prudent buyers in conventional homebuying transactions usually pay for professional title searches.

If you're selling, I suggest you carefully examine the sites' pages there that are primed toward buyers, and vice versa, to see how the sites are marketing their services to the other party. That will give you a better idea of how the whole process works.

Sellers typically get to set a minimum reserve price that must be met before a sale. This reserve price isn't shared with bidders. Other seller advantages:

  • The auction casts a broader buyer net that brings in participants from across the country.
  • Closings usually occur within 30 days of auction.
  • Buyers are always preapproved and are willing to buy as is.
  • The sites may strongly encourage potential buyers to enter into pre-auction or pre-sale negotiations, which can result in an even quicker transaction.

Among the negatives for the seller:

  • A lack of assurance that your reserve price will be met, although there's usually an option for buyers to enter into post-auction negotiations.
  • Because the purchase process is condensed, sellers may miss out on a "rising tide" phenomenon in their market, particularly with sales and values improving in many regions now.

For buyers, one drawback is that owners -- particularly banks -- will occasionally nix a sale, even if the reserve has been met.

So tread carefully, and do your homework. Observe a few auctions, if you can. Good luck!

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