The Online Auction Is Extremely Competitive
I am assisting one of my investor clients with bidding on a property that is being sold via an online auction. The online auction has lots of rule but it is essentially straight forward. A bidder registers to participate in the auction paying a fee, starts bidding when the auction opens up, and hopes to be the winning bidder when the auction is over.
Why is the process so competitive? Well every bidder is trying to get a 'steal' and as one person bids the next bidder has got to beat that bid by the incremental dollar amount required in the bidding process. So I bid $20,000, and the next guy or gal outbids me at $30,000 and the increment is $10,000, I have to outbid the previous bidder starting at $40,000.
Auctions can be one way to get a great deal - a 'steal' - on a property, but the bidding is competitive and it is also risky.
What are the risks?
- There is no contingency for an inspection of the properties up for auction. Truly 'as is' purchase or the investor loses his upfront fee to participate in the bidding. The property could be a simple carpet and paint repair or it could be more extensive repairs requiring a greater cash outlay post closing.
- If the winning bidder does not follow through and close on the deal, the winning bidder could lose his earnest money (5% to 10% of the winning bid amount) and /or the bid participation fee of $2500.
- If the winning bidder opts not to purchase title insurance, the winning bidder might be stuck with a property that has title problems. I have advised my buyer to be ready to purchase title insurance along with paying the closing costs and my service fee.
Auctions are not for everyone because of the inherent risk in the process. But if a buyer can stomach the process and handle the outcome while still getting a great deal, then it is worth the try.
In my case I know the neighborhood and the buyer stands to get a property with $20,000 to $40,000 in equity after repairs if we win. Tomorrow is the final day for this particular online auction, and we will know by 12 noon EST.
Office 404-418-8092 Cell 404-246-3210 Fax 404-991-3770