How does a housing auction work? Online?

Question

Hello! I am diving headfirst into this deal here, because the house looks stupendous - it's on a big lot, it's CHEAP, it's in my area, and I'm very interested. BUT, it's up for online auction. Now, I'm not sure what that means, or how it works, (or if it's even legit?). I found the property on Zillow and followed through to the broker's info page, as its a foreclosed property listed at (starting) $10,000. My question is, since the broker didn't answer, what should I make of this? The "bidding" is said to start tomorrow, but is this even a legit thing? Online bidding on a foreclosed house? I have the capital available to purchase the cash deal, and I will provide a link to the bidding if necessary, but if you have any guidance, suggestions, tips, or information on the subject, it would be much appreciated!

Brian Burke · Answer

@Amelia Bartlett don't be fooled by the low starting bid, that bid is only displayed to entice people into the game.  I can't speak to the specific property that you are interested in, but in general terms most online auctions of foreclosed property are legit.  They will be posted with a very low starting bid, but have a hidden reserve price so that if the final bid is too low the seller has the option to reject the offer and put it back up for auction again or list it on the MLS.

Be sure that you carefully read the terms of the auction.  There is likely a buyer's premium (5% is pretty common) that is added onto your bid price.  Some auctions convey title via quitclaim deed without title insurance, which means that you'd better know how to research the title and understand what you are buying.  In other words, are there any outstanding liens or encumbrances on the title that you will inherit along with the property?  Other auctions are conveyed by grant deed or warranty deed, and those carry less risk, so again, study the terms and conditions of the auction.

You will most likely be buying the property AS IS with no warranties as to condition, code violations, etc, and in some cases the properties are occupied by tenants or former owners and it will be your responsibility to evict them.  Good luck, and just remember "buyer beware!"

Brian Burke · Answer

Jeremy W. I'm not familiar with the company you mentioned so I can't comment with authority, but I suggest you do complete due diligence in anyone you hire to do title searches for you and you should always be prepared to bear the losses in the event of a title mistake.  Title insurance is a policy that you purchase, you are named as the insured, and it protects you in the event that the title company missed a lien on their search or if something else comes up later (such as a forged deed, etc).  In the case of your example, you call it a liability policy.  A liability policy might protect THEM if you sue them, but I'm not sure how it protects YOU.  You aren't named as an insured on the policy.  Perhaps I'm missing something, but this isn't something I'd personally bank on.

Chad U. · Answer

Jason, the $1M coverage they offer is only if you buy the property and you take out a title policy with them. They will not insure the preliminary search that they do for you and if for some reason you don't use them.  If they miss something like an unpaid lien that you aren't aware of when purchasing, you'll be responsible for it after closing.

Jason Farr · Answer

@Brian Burke

Thanks for the reply.  After rereading it after I talked with them I kind of had that same feeling that you appear to have which is the customer would probably have to sue them to try to get the money.  It is just that they put this information right out in the middle of the homepage which makes it look like a benefit of doing business with them.

Jason Farr · Answer

@Brian Burke I have a question about the statement you mentioned earlier on this topic.

"You can hire a title company to do the research for you, but they will not be on the hook if they make a mistake...you will."

Have  you heard of a title search company having insurance to cover their  searches if they miss something like a lien?  I found a online company  called Protitleusa.com that states on their homepage that: "Every  residential search is insured for up to $1,000,000 with our professional  liability insurance."  I could not find anymore information about this  on their website.  I did call them with a bunch of questions and talked  briefly about their services and when questioned about the statement  they told me if they made a mistake I will be cover for up to the  $1,000,000.

The property I was interested in was an online  auction and which was going to use a  quit claim deed and I felt this  could be a way to reduce risk.  After I thought about their statement a  little bit more I e-mail them and asked them for the terms and  conditions of the policy.  They did e-mail back, but not with the  information I was looking for.  The response was "Could you please  advise the name of the company your represent?"  Not sure why they asked  for the information, but I explain my situation.  Still waiting for a  response.

I did not order the report because in the meantime I  found that the information about the property listed on the online  auction was in my opinion grossly misrepresented and very deceptive  which added a lot more risk to the project that was higher than I was  willing to take.

Jeremy W. · Answer

A title search is necessary on the house only if it is a quitclaim deed, correct? The property I am looking at is Bank-Owned and "as-is." The title should be clear, but what else should I look out for?

Amelia Bartlett · Answer

All right, I know which direction I'm headed in. Thanks a ton @Brian Burke , off to learn!

Brian Burke · Answer

@Amelia Bartlett, there are numerous threads discussing the topic of title searches here on BP.  While that's a good start, the rules vary from state to state and there can even be variations in different counties within a state.  Buying without title insurance isn't a beginner's game unless you are playing with money that you can afford to lose.  You can hire a title company to do the research for you, but they will not be on the hook if they make a mistake...you will.

Amelia Bartlett · Answer

Thank you both! It sounds like auction properties might not be my "beginner" standpoint. The idea of researching the title and quitclaims sounds a bit daunting for my first crack at the game. Are there any resources where I could learn about titles? I find myself lacking a great deal of general information on the process of purchasing and selling a home - what paperwork and steps are involved, what things I need to be careful of and look out for. @Brian Burke and @Aaron Junck - I have been devouring BiggerPockets, but I have yet to find these concepts explained - do you know where I could find more info?

How does a housing auction work? Online?

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