Real Estate Deal Analysis & Advice

3 Hidden Pitfalls of Online Auctions (& How to Avoid Them)

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couple on laptop, on holding gavel, online auction concept

When you buy property on online real estate auction websites, you can lose your deposit without closing on the property or even end up with a property you can't sell. Here are three common issues with internet-based auction platforms and how to avoid them.

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1. You must sign their contract where they typically agree to provide insurable title.

Insurable title usually means that they will provide title insurance with noted exclusions. If there are clouds on the title, their title insurance company will provide insurance that excludes those issues. Therefore, that means it's insurable—but not "marketable."

What does that mean? There may be improperly discharged mortgages, unrecorded death certificates, or any number of other issues. Some issues are a big deal; some are not. But the best time to clean up those issues is before you buy it, not afterwards.

Why is that a big deal? You want to sell to an end buyer, and that end buyer's lender probably won't find those exclusions acceptable. You'll be stuck cleaning up the title when you have no leverage with the bank that sold it to you. The bank has no incentive after closing the sale to you, either. They have your money and are done with it.

Enter button with Gavel on computer keyboard, online auction concept

Related: How to Find Real Estate Deals Using Hubzu (& Other Online Auction Sites)

2. Frequently, they will even pay for the title work. What could possibly go wrong?

Really? You want to trust them to find all the problems with the foreclosure that they may have improperly executed in the first place? And if they do find them, the title insurance will exclude them. Of course they want to pay for that! Don't take the bait, er…I mean the free title insurance. If you have the option, use your own title company.

3. Once you win the bid, you must send in your deposit within a few days—and you can lose that deposit.

If they have agreed to provide insurable title, and you are borrowing money to finance the deal, your lender won’t close if the title is not “marketable” but is simply “insurable.” That is a legal definition that I’m not qualified to discuss, but trust me, your attorney (and mine) understand it very well.

Now what? You’ve put your money down, and you can’t get financing!

euphoric man motioning that he's won while and watching a tablet in a coffee shop terrace of a port of urbanization with the sea in the background

Related: I Almost Bought Properties at Auction: Here’s What Stopped Me

How to Avoid Common Problems With Online Auctions

Normally, a title search is done by the closing attorney after you have secured financing and are moving toward close. I recommend getting the search done right away.

Most importantly, once you win the bid, and before you send in your earnest money deposit, order a title search immediately. That way you'll know you won't have that problem before you send in your hard earned bucks. You'll also know what the issues are and if they are fixable in terms of rehabbing the property.

You Won the Auction. What Now?

Find a title company that can run title within two days. I know it can be done, because my attorney does it for me regularly. It is likely that you will need to find one with an in-house title abstractor.

Keep searching; ask around at your local real estate group. Don’t try to get it for free, either. Pay them, and make sure they know you aren’t trying to get something for nothing. It’s totally worth the $250 to save you the thousands on a lost deposit.

After that, you can move forward in the deal with confidence. But understand that your lender may not use your title company, and you may have to pay for it again. Regardless, it’s worth it.

Have you purchased property on auction? Good results? Bad results? Heard any horror stories? 

Comment below. 

Ann Bellamy has been a hard money lender in Massachusetts and New Hampshire since 2006 at Buy Now, LLC and has been investing part time in rental p...
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    Steven Pool from Superior, WI
    Replied over 1 year ago
    Thanks for the post! I’ve been looking into online auctions late and have a couple questions: Is there any reason not to run a title report prior to winning the bid? My title company charges $75 per report and is done within 24 hrs. It seems worth it to have the report done prior to bidding on the property. Maybe I’m confusing the title report with the title search? Thanks in advance!
    Ann Bellamy Lender from Tyngsboro, MA
    Replied over 1 year ago
    Steven, no, I can’t see a reason other than cost. If you are willing to pay before you win the bid, go for it. Most experienced buyers I know have learned to do their own title searches, but I personally would not trust my abilities to be up to par. And since all real estate is local, including customary terminology, the difference between title search, title report, preliminary title, full title search, etc, can be all regional custom. All I’m trying to say is to be sure you find out the status before you plunk down your money, since if you don’t close, you won’t have a contingency for “marketable title” and you’ll lose your deposit.
    Roger Mohnani from Richmond Hill, New York
    Replied over 1 year ago
    hello Steven can you please let me know the title company you use thanks
    Roger Mohnani from Richmond Hill, New York
    Replied over 1 year ago
    i thank you Ann very much very good information always was confused with title search when and how to order i am in new york would you know any good title company and reasonably priced thanks again
    Ann Bellamy Lender from Tyngsboro, MA
    Replied over 1 year ago
    Roger, thanks for your kind words. I’m afraid my real estate knowledge is very local, and I don’t have any title contacts in NY, sorry!
    Jerry W. Investor from Thermopolis, Wyoming
    Replied over 1 year ago
    Ann, Very good article. I have only won one auction where they said I met the minimum price. It still hasn’t closed yet. I opted to pay to have my own title company insure title and they found over a $5K lien that had not had notice sent to them in the foreclosure. They are arguing with the attorneys who did the foreclosure about who will pay it off. As a last resort I would be willing to take it with the lien, but would prefer not to. I also bid on this property for nearly a year before getting it. The winning bid amount was the same amount I had bid many times and had not accepted. They eventually lowered their reserve price. The place had been empty for nearly 3 years, and was badly trashed.
    Ann Bellamy Lender from Tyngsboro, MA
    Replied over 1 year ago
    Thanks, Jerry, I appreciate your kinds words. The whole thing of minimum bids, auction shills and how often you get to close is a whole ‘nuther topic! I haven’t don’e enough of them to speak with authority from the perspective of being a buyer, so I’ll leave that one to someone else!
    Scotty Ball Investor from Gainesville, Georgia
    Replied over 1 year ago
    Great post! I’ve seen many clients fall for the “free title insurance” and then have problems later……trusting the seller to handle title is like trusting the fox to guard the henhouse.
    Ann Bellamy Lender from Tyngsboro, MA
    Replied over 1 year ago
    Exactly my feeling, Scotty!
    Eric Boakye Accountant from Atlanta, Georgia
    Replied over 1 year ago
    Thanks for such good information Ann! Is this title discussion also relevant to Court foreclosure auctions and Bank Owned purchases as well? Also, once the title part has been cleared/solved, would you or anyone on sthis forum with experience in Auctions (online/court) be able to share what other things to look out for. Looking to plunge into auctions, but being extremely cautious and any information you can provide will help greatly! Thanks in advance.
    Ann Bellamy Lender from Tyngsboro, MA
    Replied over 1 year ago
    Glad it was helpful, Eric. In my experience, online auctions are generally for bank owned properties. Meaning the foreclosure auction has happened, no one bid but the bank, and the bank ended up with the property. The online auction platforms are frequently created to serve only REO properties. There is some change in that landscape, but I am not well versed in the changes. For Court foreclosure auctions, or non-judicial foreclosures, the risks are totally different and much more hazardous. I strongly recommend that if you are a beginner, that you NOT buy at a foreclosure auction. You can end up owning a property with a first position still in place. This happens when the lien that forecloses is actually in second (or later) position. In that case, a pre-bid full title search is very important, because if you don’t close, you’ll lose your deposit. There are so many issues that can arise in a foreclosure auction, including improperly executed foreclosures, that I strongly recommend you look at other auctions first. Foreclosure auctions are not recommended for beginners. Even seasoned vets can get caught on these. In addition, since you usually can’t get access to the inside before you bid or close, and since your lender (even if hard money) will probably require that they see the inside before they close, you can end up losing your deposit once again if you don’t close because you can’t get funding. I can’t even think of all the reasons not to buy at a foreclosure auction when you start out. Just don’t. 🙂