Auctions: Part 4 - Retail Auctions

The next in a series about Real Estate Auctions, this post discusses what I call "retail" auctions. These are the ones you see advertised in the late night infomercials, on signs, in magazines, etc. They're held in ballrooms, convention centers, or perhaps at a property. While they may be single property auctions, multiple property auctions are more common, and sometimes have only one owner - a bank, who hopes to dispose of multiple properties at a single event.

These are private auctioneers, hired by sellers (today this is mostly being used by banks to dispose of their post foreclosure holdings). These auctioneers are selected for their promises of grand marketing campaigns. Logic dictates that the more exposure you have, the better your chances of selling a property. Further, with auctions, you create something that has largely been missing from our marketplace, a sense of urgency. That urgency is created by the auction deadline.

These auctions work under the assumptions that the higher number of people in attendance, the better prices the properties will bring. They get consumer attention by giving the impression that banks are pricing them well below market and willing to sell at any price. The auctioneers and sellers hope that once you get the potential buyers in a crowded room they will compete against one another to increase the price. Buyers hope that price is well below market value. Sellers hope it will be well above. The auctioneers really just want it to sell (that part is a secret).

To get attention, the advertisements will say "opening bid $20,000" for a property that is clearly worth $200,000. Since we know the difference between an "opening bid" and a "minimum bid", we know that does not mean that the bank is willing to sell the property for $20,000. When you call the auctioneer, you'll likely be told (only if you're educated enough to ask) that the auction is a "reserve" auction. This frustrates consumers. But, I wish they understood that the auctioneer doesn't just facilitate the transaction, he represents the owner. The auctioneer has a contractual obligation to the owner to hold certain information in confidence, including the minimum selling price. It is in the best interest of the owner that the potential purchaser does not know the minimum selling price until he's made his best and final offer.

In any case, headlines like "Bank sale of foreclosed properties! Hundreds to be sold! Minimum Bid $20,000!" will bring out all sorts of buyers who think they smell blood. And, if you play your cards right, you could be one of them! (lol)

Although it is my goal to dispell myths here, I don't want people to think that the entire thing is a scam. It's not, it's a marketing tool. The sellers (in my examples, the banks) DO want to sell the properties. If they get the right price, they will. While the price is not $20,000... it may be lower than you think.

Before showing up at the auction, do your homework:

• Review the purchase agreement, get advice on it.
• You may need to have your financing lined up (and may be risking your deposit if your financing falls apart after the sale). Check that purchase agreement for financing contingency language. Some allow financing contingencies only if you're getting financing through their preferred lender, which often will be the seller.
• You are likely to have to do any home inspections and perhaps appraisals in advance of the auction. This information, too, is available by reviewing that purchase agreement. Find out (and attend) one or more open house/inspection opportunities.
• You will need to know what money you'll be required to present in order to bid (this is usually a set amount in the form of a cashier's check).
• I recommend getting a broker's price opinion AND an appraisal. Hopefully, the two are fairly close, and then you'll know what your maximum purchase price should be.
• Understand how, if at all, your real estate agent will be compensated by the auction company. They may not be compensated at all, and you may have to pay the agent out of your pocket at the settlement table. It's worth it, but talk to your lender and make sure it does not mess up the ratios required for the purchase.
• Ask if there is a "buyer's premium" and how much. Confirm that the sales price shown on the purchasing agreement will be the "gavel" price plus the buyer's premium, and make sure your lender is comfortable with how that will affect your loan.

Once you get to the auction, you'll be registered to bid, given a brochure and told approximately when the property will be auctioned. Other vendors are likely to be present, perhaps a mortgage company, maybe a title company, etc. who may be able to answer your questions and solicit their services. When your property is called, be ready. Things move quickly. You will have no time at all to think through what you wish to bid. If you are to remain competitive, you must continue to bid. If you need to think about it, you'll lose. Again, your agent can assist you with this process, help you keep your focus. Then, it's done.

The highest bidder wins, if they meet the minimum reserve set by the bank. Assuming there is one, the winner has more paperwork to do, and then you're done. That's it. By the time you realize whether you won or lost, they've auctioned off 2 more properties.

If the highest bid does not meet the minimum reserve required by the bank, but it's pretty close, the bank will often continue to negotiate with the purchaser after the auction...and sometimes, will reach an agreement. You see, the auction is a process, it is not a day.

If there is no satisfactory buyer that produces a bid the seller is willing to take, the property will likely be re-listed again with a "regular" listing agent and marketed through conventional means. This time, the bank's been able to reevaluate the pricing strategy they have, based on the bids received at auction. If the bank had previously priced the property at $210,000, and they had 2 registered bidders producing a high offer of $160,000; then the bank may have the property re-appraised, and may lower the asking price to $175,000; and here they usually pay your agent's fees for you, and allow reasonable financing, inspection and appraisal contingencies, with more time to think about each decision. It's a better process for the buyer, but still has it's own headaches. For more information on purchasing REOs, read my previous posts.