How to buy foreclosures at an auction
Rob Friedman, chairman of Irvine, Calif.-based Real Estate Disposition Corp., or REDC, which now presides over nearly 500 auctions a year, says potential buyers can definitely get a "steal of a deal" at an auction, but also warns novices to be wary.
"Getting a steal at auction boils down to preparation," says Friedman. The biggest auction mistake, Friedman says, is lack of homework. "You have to set out to quantify risk, inspect the property well, and then quantify the necessary repairs and run price comparisons, or 'comps,' in the neighborhood so you'll know the values."
Many buyers have never attended a real estate auction before -- either a large auction like REDC operates, or those smaller, trickier "trustee auctions" routinely conducted on courthouse steps around the country. Both can be intimidating for novices and fraught with unseen peril, particularly the latter.
In the larger sessions, which typically feature dozens of foreclosed homes in a sizable geographic region, novice attendees may feel lost in a sea of bid-calling, whistle-blowing and exotic finger signals.
Experts suggest interested parties test the waters by attending a smaller auction as an observer.
Depending on the size of property, bidders at these auctions will usually need to bring a certified check for $5,000, made payable to their own name, to show the auction firm they have legitimate intent, Friedman says. The successful bidder then signs the check over to the auction company. Losing bidders simply redeposit the check in their accounts.
Larger auctions usually have two or three of the largest mortgage lenders in attendance, though buyers "are certainly allowed to go to their own lenders," Friedman says.
Then there's the matter of the "buyer's premium." REDC and similar firms such as Williams & Williams usually charge a 5 percent fee for their services. Friedman suggests that would-be buyers add that sum into the calculations of the amount they are prepared to pay at auction. Unlike trustee auctions, homes at these events nearly always have free-and-clear liens and up-to-date property taxes and fees.
Below are 12 tips to help you come out a winner at auctions, six for large public auctions and six for those "courthouse steps" auctions.
Stealing a deal at regional public auctions
1. Timing: When several bidders are jockeying for a property, wait until the bids start to die down before making yours. There's no sense fueling the fire.
2. First dibs: The first few properties offered often sell for less because most bidders are trying to get a feel for pricing patterns before jumping into the fray.
3. Dress (and act) the part: Some buyers like to dress like a banker and arrive early to position themselves near the auctioneer. That's so other bidders will assume they're representing the lender and possibly shrink back from a bidding war.
4. Research multiple homes: Don't miss those open houses; they typically run from one to three days. "Do your homework on a lot of properties," Friedman says. "Try to come to auction in love with 10 properties instead of just one." Bring detailed information and photos of each house you're interested in to avoid confusion.
5. The pro knows: Bring a veteran rehab contractor with you to the open houses to estimate repair costs. That will keep you from overlooking hard-to-spot damage and flaws and give you a more accurate picture of what you're buying. Pay special attention to plumbing and mechanical systems.
6. Market research: Find out the recent -- in these troubled times, no more than the past three months -- selling prices on neighboring homes. Realtors will often try to win your business by providing these "comps" that show what comparable homes in the neighborhood are selling for. To be realistic, the comp prices should factor in all auction-bought and short-sale homes in addition to standard MLS sales.
Trustee Auctions
Sean O'Toole has purchased upward of 150 investment homes at courthouse auctions, or trustee auctions. They aren't for the fainthearted, he says.
"These take a more sophisticated effort (than the larger auctions)," says O'Toole, founder and chief executive of ForeclosureRadar.com, a foreclosure service for real estate professionals. "They are a different animal. Five guys standing around a courthouse with a million dollars in checks in their pockets. That can be bizarre and a little intimidating."
The "notice of trustee sale," sometimes called a "sheriff's sale," will be published in a newspaper of record once weekly for at least three weeks prior to the sales date. However, you need to do your homework and then some before attending, O'Toole says.
The good news for individual buyers, though, is that if trustee auctions in California portend future price trends, those "stealing" opportunities may become even more abundant. In February 2009, 80 percent of the California properties sold at trustee auctions were discounted an average of 36.3 percent, while 40 percent were discounted by 50 percent or more, according to data from ForeclosureRadar.
1. Title search is best chance for success: Many a buyer has left the courthouse steps after unwittingly buying only one of two mortgages when they thought they were getting a clear title. "If you listen carefully, you'll hear something to the effect that, 'This property is sold subject to all liens and encumbrances,'" O'Toole says. First-time buyers won't always know what liens and encumbrances are, he says. Some buyers will also find themselves obligated for past-due taxes, IRS liens or liens imposed by unpaid contractors. They may even be responsible for evicting the occupant. "The title search is a must," O'Toole says.
2. No open house?: Trustee auction homes seldom have open houses because the previous owner still occupies the place, O'Toole says. So how do you know what's inside? You can always look in windows when no one is around or talk with neighbors. "But there is also a rule of thumb that the inside will look like the outside," he says. "If there are weeds and trash in the yard, the inside will usually be a mess. If the outside is neat and tidy, so will be the inside."
3. Bring your life savings: No fooling, you'll need the full sum. "The fact that you've got to pay in full at trustee auctions excludes most people from the process," says O'Toole. Bring checks filled out in the trustee's name or cashier's checks that you can sign over. Some states, including Arizona, require only small earnest money deposit but with a relatively short follow-up period to pay in full.
4. Neighborhood research: If you're buying an auction home to resell, shy away from one in an area with an overabundance of foreclosures. The values are still likely dropping there.
5. Know local laws: When a trustee-sale property is bought, there is only a short period -- usually 10 to 15 days -- for any lien holders to claim their stakes before the house officially changes hands. So cross your fingers. Fortunately, most claim action by lien holders happens before a trustee sale. However, some holders have filed suits for damages against the old lender and even the new buyer after those 10 to 15 days, alleging proper notice of the sale was not given.
6. Consider 'munis': Auctions held by municipalities can be a less-complicated option than trustee auctions. Typically, such homes are sold only to cover back taxes and have fewer encumbrances.
Above all, "make sure you clearly understand what is being sold," says O'Toole.
