As the Ottawa real estate market continues its upward trajectory, buyers and sellers may have noticed a new way to buy and sell residential properties: online real estate auction sales. Online real estate auction sale companies aim to disrupt the traditional buying and selling process by charging less than the standard real estate agent commission and by allowing potential buyers, or “bidders”, to see what other interested buyers are offering for the property. While the option to auction your house seems appealing, parties interested in the online auction process should be well aware of the risks.
- No Regulation of Real Estate Auction Sales
While the perceived perks of listing or bidding on a property on an auction site may be attractive, buyers and sellers should be aware that real estate auction sale sites are not currently regulated. In contrast, real estate agents and brokers are regulated under the Real Estate and Business Brokers Act (the “Act”) which is enforced by the Real Estate Council of Ontario (“RECO”) on behalf of the Ontario government. Unlike unregulated real estate auction sale websites, prospective real estate agents must complete a number of education courses, participate in practical simulations, and pass multiple exams in order to become licensed. Further, once licensed, real agents must undertake annual continuing education courses and be an employee of a brokerage that is overseen by RECO.
The benefits of retaining a properly licensed real estate agent include the protections that come with RECO’s oversight. For example, RECO ensures that all real estate brokers and agents are insured. This insurance protects deposits that are held by the real estate agent at no additional cost to the buyer or seller. Often, real estate auction sale websites will insist on holding the deposit without providing any of the protections that buyers and sellers receive when a deposit is held by a real estate brokerage.
Further, licensed real estate agents are required to comply with all relevant real estate regulations, including a Code of Ethics. RECO enforces the Act and the Code of Ethics, such that real estate agents who fail to comply are subject to disciplinary measures. Therefore, buyers and sellers who engage a real estate agent or brokerage have recourse via both the law and RECO if an issue arises with the purchase/sale. These additional protections are not available when buyers and sellers engage a real estate auction sale website.
- Lack of Transparency
Auction sale websites bill themselves as being a transparent alternative to the traditional buying and selling process since buyers are able to see what other potential buyers are bidding for the property. However, this transparency does not extend to the auction companies themselves. Since they are unregulated, buyers have to trust that auction sites are being run responsibly and ethically, without being able to rely on enforcement by RECO if they are not. In particular, since buyers do not know what is going on behind the scenes at the auction company, they have to trust that the auction site is ensuring that bids are coming from legitimate potential buyers, as opposed to parties trying to inappropriately drive up the purchase price with no intent to actually buy the property.
Buyers should be careful when relying on materials that the auction sale company prepares on behalf of the seller about the property. Not only are the materials likely prepared in favour of the seller, they may not be complete or may only provide very limited information to potential buyers. When traditionally represented, the buyer’s real estate agent can help interpret the materials and provide the potential buyer with insight as to how comprehensive and reliable the materials are based on their specialized training and experience. Without representation, the buyer is left to review this information on their own and will likely require additional independent due diligence to confirm that the information provided by the auction sale company is accurate and complete.
- Limited Liability and Buyer/Seller Recourse
Since auction sale websites are not regulated, buyers and sellers who engage the services of such a website have limited recourse if something goes wrong with the transaction. Real estate auction sales are essentially private agreements and so the primary recourse would be through the Court. However, buyers’ and sellers’ success in Court may be limited because, often, the agreements of purchase and sale prepared by auction sale websites contain multiple limitation of liability and indemnity clauses which protect the website and are to the detriment of the buyer and seller.
Unlike the standard form of agreement of purchase and sale that has been approved by the Ontario Real Estate Association, the agreements prepared by real estate auction sale websites often require the buyer and seller to enter into the agreement solely at their own risk and to renounce their ability to seek recourse against the auction sale company or any companies that are related to it. Since auction sale websites are a fairly recent phenomenon, it is unclear whether these types of clauses would be enforceable in Court. Either way, the additional protections that working with a real estate agent provide are not available to buyers and sellers who choose to engage a real estate auction company.
In light of the lack of regulation, zero oversight, and agreements of purchase and sale drafted in favour of the seller, real estate auction companies evoke the timeless phrase: “buyer beware”. Buyers and sellers should always consult a real estate lawyer prior to entering into any agreement of purchase and sale. However, this step becomes even more important if you are considering engaging a real estate auction company rather than working with a licensed real estate agent. The members of Soloway Wright’s Real Estate and Development Group are here to answer any real estate law or real estate development questions that you may have and to help guide you through the buying and selling process.