Even when the market is down, real estate is a sound investment. Whether a savvy wholesaler, a prospective landlord or an owner-occupant searching for an affordable house, homebuyers (or commercial real estate financiers) want worthwhile properties at low prices. Preferably they will come with minimum fuss. Working with realtors, banks and attorneys--transaction by transaction--can be time-consuming and frustrating. On the other hand, real estate auctions allow buyers to bypass some of the red tape typical of these transactions. Using their own funds or those belonging to others, purchasers can procure quality real estate for a fraction of market value. While some of the properties require substantial renovations, others are virtually ready for occupancy with few repairs. Flipping, holding or making it a home, the new owner can brag of substantial savings.

How Do Live Real Estate Auctions Work?

A house or building shows up at auction because either the owner defaulted on a mortgage loan or the owner defaulted on property taxes. In the former instance, the bank or finance company seizes the real estate through the foreclosure process, auctioning it off to recoup some of their losses. In the latter case, the land is taken by the taxing authority--often the county or municipality--because of unpaid property taxes or liens. In this case, the auction is under the auspices of the local sheriff. If defaulted on a mortgage, the collateral is sold by an auction company. Either a courthouse or a rented hall (or hotel ballroom) is the usual venue for such an event.

In addition, two different formats govern the auction rules. An absolute auction invariably favors the highest bidder whereas the lender confirmation auction requires the bank to sign off on the new owner, independent of the bid amount. Depending on the edifice, the starting bid could be equal to the balance due on the mortgage or taxes owed. Alternatively, it could go lower. At any rate, laws forbid lenders from making more than they are due from a foreclosed property. Similarly, a local government can not profit from a sheriff's sale.

Prior to the auction, the lender may allow the auction company to convene an open house for subject properties but this is not a rule. Just as often--if not more--prospective buyers must make due with going to the neighborhood, assessing the house as best they can from the outside. Auction companies and sheriff's offices expect and specify earnest money down in the form of a cashier's check or certified funds. After all, every bidder is a potential owner so the auction sponsors expect to see some skin in the game. The issuer of an accepted bid must surrender this deposit, pay auction fees and--if necessary--present evidence of mortgage financing to support the bid. In fact, investors usually pay all cash.

How Do Online Home Auctions Work?

When auctions take place through the internet, they differ from live auctions in obvious ways. Geographic scope is broad and most of the subject properties are unavailable even for drive-bys. Beyond that, many online selections are neither foreclosure nor tax sales. Some, for example, are bank-owned parcels acquired years before the auction. Others are agreed-upon short sales whereby lender and owner consent to selling the real estate for less than the full debt amount. Still others are put up for auction by investors who are unable to sell after renovations.

With online competitive sales, the opening bid might bear little resemblance to the fair market value, serving rather as a hook to hungry investors. Although market value is sometimes listed with the online profile of the house or business, most sellers do not expect to receive bids that high. On the other hand, sellers who do business at online auctions do maintain a reserve price. In other words, the seller is not obliged to part with the property if a pre-set price threshold is not crossed. In this event, the highest bidder does not get the house. Although the concept of reserve price might appear to undermine the auction's purpose, this feature makes the online auction a more attractive selling vehicle.

Like a live auction, bidders must deposit monies with the auction company in order to participate. Also similar to live sales, earnest money must be presented by the successful bidder. Once registered, bidders have access to point and click technology that records bids instantly. Moreover, auction websites can filter their inventory down to those properties of most interest to the bidder/buyer. These sites all represent motivated sellers but--be informed--the degrees of motivation can vary widely.

Additional Information About Real Estate Auctions

Those new to real estate auctions do well to watch and learn. Many participants are seasoned veterans, with years of successful bidding under their belts. A few tips can help newbies get up to speed.

• Start with live auctions featuring local properties. Even if the homes are not entry-accessible, a survey of the exterior, the yard and the neighborhood reveals much information on the home's value.
• Learn the regulations of each auction. What is the required deposit size? What is the earnest money percentage? Do the properties have owner-occupancy mandates?
• Stay calm and think clearly. A house might be everything a buyer wants...until the unknown variables are discovered: environmental problems, bad neighbors and termites are possible in any house that is sight unseen. Remember that as the bids go up.
• Losing bidders should never think the deal is done...that is, until the successful bidder actually takes possession of the subject property.

Real estate auctions can be exciting, profitable and educational. In addition, they help banks and other lenders to dispose of expensive holdings, making dwellings more affordable in the process. Succeeding in this business calls for a sober, well-informed approach that anticipates problems without being frightened by them. While live auctions are good to start with, online venues widen the available range of real estate for sale. The possibilities are endless if the bidder is both bold and discerning.