Real Estate Auctions: Be Forewarned

(Riverside, California)…One of the latest sales vehicles in a real estate market such as ours is the Real Estate Auction process.  There are many different auction companies, and while Westcoe Realtors has represented many of our clients at these auctions, our clients always attend with a complete understanding of what they are getting into.  We say this because unless you totally understand what is happening (and equally importantly, what is not happening), this entire process can be everything from wonderful, to a waste of time, to very expensive.  Allow us to explain.

First, the general modus operandi of these auctions is to advertise in the paper, internet, etc, what a wonderful savings they can offer the lucky bidder.  These ads usually take the form of showing you the existing listing price as the home appears for sale today, quickly followed by the incredible low price offered at auction.  The difference, in many cases, is really quite staggering…and this huge “savings” you can obtain starts you down the path as a savy investor/buyer who is ready to make a killing on your real estate purchase.

However, as we have mentioned many times before, if it looks too good to be true, it probably is.  SO….where is the catch?  Read on….and understand that not all of the following is true in all cases…but it is true in enough cases to warrant this information being passed on to you.

Understand, most auctions get their inventory from banks who have foreclosed upon these properties…and many times, these properties have already been listed for sale with a real estate broker.  However, when the property does not sell (and trust me, the only reason it does not sell with the broker is that it is overpriced), then the lender will pull the property and place it with an auction house.  The auction house will then run the above mentioned ad, where they show the previous price and the starting bid price at their auction.  However, what is seldom mentioned is that THE PRICE SHOWN IN THE ADVERTISEMENT IS WELL BELOW THE RESERVE PRICE THE BANK HAS TOLD THE AUCTION HOUSE THEY WILL ACCEPT ON THE PROPERTY.

In essence, the advertised starting bid price is simply a number picked out of the air to generate excitement…and not necessarily approved by the lender as a price they will take.  The reason the auction house does this is twofold:  the price descrepancy looks great in the ad, and they want to encourage people to enter the bidding process and bid the price up.

At the auction itself, once the bidding has started, ultimately someone will bid the highest price, and the property will be “sold”…and maybe it will be.  If the ultimate bid price exceeds the reserve price of the lender, then congratulations…you are a homeowner.  However, in an alarming number of cases, the winning bidder will be told the bid price will be submitted to the lender for “final approval”…a final approval that may never come.  The auctioneer knows full well your price is lower than what the lender has said they will take, but they submit your bid price anyway.  Why?  Because the auction house hopes either the lender will be persuaded to take your lower price, or you will be so excited you will pay the lenders higher price, or a combonation of the two.  This process can take a few days to a few weeks, until the buyer and lender either agree on a price, or the home goes back on the market with either another broker or auction house.

Please don’t misunderstand us.  Westcoe is not anti-auction.  On the contrary, we have worked with many auction houses and clients to successfully bring about a purchase.  The system is OK for what it is, but our concern is with all the unrepresented buyers we see at these auctions who do not understand the ground rules.

Another thing to be aware of is the buyers premium that is placed on every sale.  This is a percentage added to the bid price THAT THE BUYER AGREES TO PAY to complete the sale.  Sometimes our agents have seen these unrepresented buyers gushing at their “great bargain” only to discover that the buyers premium is anywhere from 5-8% of the sales price.  That’s a big number if you are not prepared for it, or did not take it into account when you entered the frenzied bidding process.

And while we are at it, please be aware that the auction and bidding process is exciting…and fast paced…and energetic…AND DESIGNED TO MAKE IT EASY FOR YOU TO GET CAUGHT UP IN THE PROCESS.  When we attend an auction with our clients, we have done our homework, compared the home to other repo’s for sale, know the faults with the home and perhaps, depending on time, gotten a bid for all the necessary repairs, and in the end, established a maximum price that our client should pay for the home…a price that we know beforehand we will not exceed…no matter how exciting the process becomes.  Sometimes we are astounded the prices some people will pay for a home, and the only rational we can come up with is that they got caught up in the excitement.  Well, excitement is fine, but too much of it can really put a strain on your pocketbook!  That amongst other things is why y0u should be represented by a real estate company when you attend an auction.  It doesn’t cost you anything (the bank pays our commission, not you), and by bringing a little homework and level-headedness to the equation, we can save you money and still get you what you want.

In the end, I will repeat again…Westcoe Realtors is not anti-auction.  We simply want you to understand all the ramifications of your participation, and would really encourage you to get represented by an agent before attending.  We really feel you will fare best in the long run……and if you choose to go it alone, then perhaps the above will help you from getting in too fast.  Either way, good luck, and good bidding!