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Pre-auction bids and auction site fun

Thanks to some transactions for some of my investor clients, I’m developing a new expertise… handling transactions on auction sites.

Twice in the past month, we’ve had offers submitted to local agents get ‘redirected’ to an auction site, Auction.com, where we put in “pre-auction bids”. 

In many ways, I think the process is much easier than a traditional offer, but it takes a little getting used to.  More importantly, you really have to prepare the buyers.  Investors tend to be flexible, so we were lucky.  But, a first-time home buyer could easily be confused, frustrated, and stressed out by the process.

One thing to know is that the site charges buyers a 5% premium.  Now wait, its not so bad.  When you put in the offer, you just input the total price you want to pay, and they deduct the premium from your offer. So, if your client wants to pay a total of $100,000, then their actual offer is only $95,000 (actually, $95,238).  At least, the bank that owns the property views it that way.

You put in your offer, and let them know if you will be financing the property (you can use your own lender, but check the restrictions listed on the site).  If your offer falls within a range acceptable by the bank (I’ve been told that within 10% of asking should work) then someone from the auction site will contact you back the next day and ask for verification of earnest money availability (copy of a cashiers check is all that is needed), or if its an all cash offer, proof of funds (bank statement works).

You’ll also be asked about contingencies, and this is where the process becomes something ugly for the average buyer… they are not interested in inspection contingencies or other typical contingencies of a standard offer.  The buyer need to be prepared to do an inspection before even putting in an offer, or live without an inspection later. There is also no title contingency and even financing contingencies are not allowed (though they except offers that depend on financing).

If the offer is accepted, the buyer will need to put down at least 5% as their earnest money deposit, depending on the contract provided by the bank.  oh… didn’t I mention that?  the contract will be one provided by the bank… forget your normal MLS contract… so make sure to tell your buyer to get it reviewed by an attorney. 

Another thing with the contract… their asking for electronic signatures via Docusign.  Double-check with your lenders by the way… they may not accept electronic signatures.

But, I guess I got ahead of myself… getting the contract was the last step and signalled the end of the auction site involvement… some of the negotiation ended up being verbal… anathema to real estate agents… but unavoidable.  The listing agent wasn’t even involved. It happened with an asset manager for the auction company, acting as go-between with the bank.

So, after the offer is accepted and contract signed, the transaction goes into normal mode and you deal primarily with the escrow company at that point.

I suspect this is going to be the future of REO transactions.  Small commissions to local agents to manage the property, but the offer process handled via centralized processors like Auction.com.  Especially for larger property owners like FNMA, HUD, etc.

Good luck to you as a buyer or as an agent if you run into this process in the near future!

For agents, check out this blog post about the positives of online auctions: http://activerain.com/blogsview/805016/online-auctions-for-realtors-the-benefits-are-real

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