Are Real Estate Auctions good for me?

Are Real Estate Auctions good for me? That is a question that is often raised by our clients and our answer is they can be if you have the stomach for it. We can find SCREAMING deals through these auctions; however, there are a number of things that have to be considered:

Most auction companies have similar terms to the ones outlined below:

For instance, Hudson & Marshall will require the greater of 5% of the purchase price or $2,500.00 as Good-Faith-Deposit if you are the successful bidder. They also require that you bring a minimum of $2,500 in the form of Certified Funds or Cash, just to bid in the auction. Another auction company, REDC, will require the greater of 5% of the purchase price or $5,000.00 as Good-Faith-Deposit if you are the successful bidder on your first property and the greater of 15% of the purchase price or $10,000.00 as Good-Faith-Deposit if you are the successful bidder on any property after the first one.

The purchase of auctioned homes are treated as cash transactions which means that the purchase is not contingent on loan approval. If you are not be able to obtain financing after being the successful bidder, then you forfeit all of your good faith deposit.

Homes purchased at auction are purchased in an “As Is-Where Is” condition. This means two things: What you see is what you get AND Buyer Beware. This criteria is not because the seller is trying to hide anything, it’s only because these properties were acquired through a foreclosure action and the seller (usually the bank) does not have any knowledge of the condition of the property.

To protect itself and its agents, the bank will utilize its own contract where it outlines, over and over again, that the seller and its agents cannot make any warranties or representations about the condition, title, location, or anything else associated with the property.

Once you have bid, you waive the right to cancel the transaction based on any condition of the property. So if you desire to bid on a particular property, it is highly recommended that you do a personal inspection of the property prior to making bid on line or at the live the auction. Once you are the successful bidder, the good-faith-deposit is not refundable on the basis of the condition of the property.

The seller will choose the closing agent and will pay for the title policy.

The total price paid for a home at auction is the high bid amount PLUS a buyer’s premium fee of 5%. In other words, if your highest bid is $146,000, you must add 5% of $146,000 to the total purchase price making your total purchase price $153,300. That 5% is the fee collected by most auctioneers and it stays with them.

Any commissions for a purchase at auction are paid by the seller and it does not affect your bid. That just means that if a buyer does not have representation, the bank, will get more than it budgeted for.

Most auctioned properties are sold under a RESERVED AUCTION procedure. The bank provides an UNPUBLISHED minimum bid that it will accept for each property ahead of the auction. During the bidding, if the current bid meets the reserve price, the auctioneer will cry out: “this property is now an absolute sale”. This lets everyone know that if they bid from that point on, the final bidder has an automatically seller approved price. Unless the auctioneer declares that the reserve has been met in this fashion, ALL other winning bidders have to wait for the seller to give their approval for the sale at the top bid price. This approval can take 10 minutes if a bank representative is at the auction, or up to a week if the selling bank is not at the auction. Therefore, the officers of the bank must review the highest bid and determine if they want to accept it, reject it or offer a counter-offer to the highest bidder.

To gain access to the properties, it is much easier to work with a buyer’s agent who can easily arrange the viewing of the properties. If you do not feel comfortable having representation, then, you must wait for the open houses that will be held by the auctioneers...

DO YOU NEED A REAL ESTATE AGENT TO BUY PROPERTIES AT AUCTION?
Although is not required to retain the services of an real estate agent to buy properties at auction, it is highly recommended because of the additional risks in buying at auction. A good agent will help you consider all aspects of buying at auction, provide you with updated pricing information and give you pointers on auction behavior. Your buyer’s agent can also give you access to homes you want to bid on at your convenience, not only during specific open house hours.

After you succeed at being the high bidder, your agent will know how to navigate through the process to make the transaction as smooth as possible. But buying ANY bank-owned property takes patience! The sellers are large companies that are not emotionally involved in selling the homes.

Buying a home is stressful as it is, but if you take it on your own, the stress can be exponentially multiplied. With professional guidance, you will get a great deal, approach home auctions like a pro and buy a home that really fits what you want.

Should I buy an REO Property?

SHOULD YOU BUY A BANK-OWNED HOME?

Before you set out to find the perfect bank owned property, there are some things that Eric and Soledad would like you to know based on their inside experience:

• The bank is the only seller on a bank-owned (also known as foreclosure) property; the old owner is out of the picture.
• Bank acquired title to the property through a foreclosure action; thus, they depend on local agents to secure the property and to market them at the fair market value;
• Seller will transfer the title to the property free and clear of all liens and will issue “insurable title vs. marketable title”
• The seller will select the closing agent, but will pay for the title company as customary per local customs (there are few exceptions);
• Banks will not make repairs to the property.  The property is sold in its “AS IS” condition.  However, buyer has the right to inspect the property and determine if buying a particular bank-owned home makes financial sense.

Banks do not want to own Real Estate because they only lose money while they own real estate. Banks make money by lending out their money.  The bank looks at a foreclosure property as “stuck cash”; money that they cannot use for their main function until the property is sold and the new buyer gives the bank cash for the property.

By the time the foreclosure action has been completed, the banks costs include any or all of the following:

• attorney fees for the foreclosure;
• the delinquent property taxes and all the penalties attached to the taxes;
• the cost to place hazard insurance on the property to protect them against any damage to the property while they own it;
• association dues likely are delinquent;
• city liens for city ordinance violations might have also been attached;
• and to top it all, the price that the home can be sold for today is much less than the amount of the loan the bank gave to the previous owner.   

Every month that a bank holds a property in their name, costs the bank more money in maintenance fees and insurance.  When Soledad worked for GMAC, she sometimes reviewed foreclosure expenses that were over $20,000 for just one property!  To minimize their losses, banks market their properties at the lowest prices in the area to sell fast and free up their cash.

How Do You Know IF Buying a Bank-owned property is right for you?

Of course, everyone thinks that buying a bank-owned property is right for them initially because they know that the prices on bank properties are the lowest of the low. But before you go stampeding toward bank properties, ask yourself a few questions:

Are you willing to take the property in its current condition?

Contracts for bank properties are clearly outlined as buying as-Is, Where Is.  This means that the price you negotiate is your agreement that you will take the property in its current physical state.  Now, you do have the opportunity to have the property inspected by a professional after you are under contract, but before you close.  If you find something in the inspection that you did not know when you negotiated the contract, you may cancel the contract (within the allotted time) and get your deposit back.

How much repair work and cosmetic upgrading are you willing to make after you buy?

Typically the uglier the colors, the dirtier the grout and the smellier the carpet, the better deal you are going to get on a bank-owned home.  Everyone has their own threshold for filth.  Knowing your limits in this area and conveying your preferences to Eric and Soledad will help immensely in focusing only on properties that you might consider buying.  There is a lot of JUNK out there and there is no need to see it unless it’s the kind of junk you would want to turn into something nice.

If the property is a fixer-upper, do you have cash or have you lined up a rehabilitation loan to buy the property?

To get a regular loan on a property, the property must be inhabitable.  The definition of inhabitable are slightly different for an FHA loan and a conventional loan, but in general, the property must be free of all wood-destroying pests, all floors must have floor covering, appliances must be in place, the roof must keep rain off of the inside and electrical and plumbing must work.  If the property is not inhabitable by your lender’s definition, you will not be able to get your loan approved until you find another property that does fit your lender’s definition of inhabitable.