Don’t lose your Head, or Your Shirt, as Home Foreclosure Auctions Take Off

Posted on July 14, 2007. Filed under: Foreclosure Research |

More than 500 people who attended a recent auction in Modesto never had seen houses sold that way.

The process caused confusion because some deals quickly fell through with several of the high bidders. Those houses ended up being auctioned off again and again, until the auctioneer found bidders who were financially qualified to purchase the homes and had brought sufficient down payment funds.

More auctions are expected to be held later this summer and fall. 

So here are some bidding tips for first-time buyers, seasoned real estate investors and everyone else who is considering buying a home at auction:

RESEARCH HOME VALUES — It’s definitely a buyer’s market and everything’s on sale right now. To determine a home’s value don’t rely on what homes sold for in the past because prices have been falling very quickly. Current asking prices often are substantially less than previous sales prices for identical homes.  

REMEMBER BUYER’S PREMIUM — Most home auctions charge the winning bidders a “buyer’s premium” that typically can add 5 percent to the cost of a home. That premium usually goes to the company that organizes the auction.

DON’T OVERBID — It can be easy to get caught up in the excitement of competing to buy a home. Auctioneers are good at getting buyers to up their bids. Set your limit and don’t get swept away by the moment, because you may find yourself bidding more than the property is worth.

By the time the 5percent buyer’s premium was paid, many of last Modesto’s auction prices were full-market value, agreed Jason Rivers of Rivers Realty, who also was at the event. “Those buyers didn’t get any better deals than you can find right now with regular houses listed for sale,” Rivers said. He is representing banks that have foreclosed on about 20 properties, he said, and those sellers are offering good deals.

READ THE FINE PRINT — Rules vary from auction to auction, so make sure you know what the contracts require before you bid.

For instance, many auctions allow sellers to reject very low bids. So even if you bid more than anyone else in the room, that doesn’t mean you’ve met the seller’s secret “reserve bid” price. Often sellers have a week or so to consider whether to accept your lower-than-expected offer. Sometimes they will make a counteroffer with a higher price.

LINE UP FINANCING — Often the highest bidders are required to hand over 5 percent of the purchase price immediately. Then they typically must be prepared to close escrow within 30 days. “That 30 days goes fast, so bidders should have their financing all lined up before they bid,” advised Crystal Wright, a spokeswoman for Hudson & Marshall, which is running the July 19 auction in Modesto.

Getting financing arranged in advance, Wright said, also may prevent people from bidding on property they aren’t qualified to buy.

TOUR PROPERTIES FIRST — Depending who’s running the auction, potential buyers may be able to tour the homes often or not at all before the bidding begins. Last month in Modesto, some of the homes auctioned off by the Real Estate Disposition Corp. still were occupied. So bidders weren’t able to go inside before the auction.

Homes facing foreclosure and put up for bid on the courthouse steps frequently also must be purchased without bidders getting inside.

The upcoming Hudson & Marshall auction, however, will open the homes from 1 to 3 p.m. July 14 and 15. Those homes can be toured at other times by arrangement with real estate agents.

“Don’t just bid on a property because you think the picture looks pretty,” Wright warned. The homes are “sold as is,” she said, so bidders should look closely before buying.

HIRE A HOME INSPECTOR — Foreclosed houses can have construction problems that inexperienced buyers may not spot, said Matthew Irion, owner of M.K.I. Home Inspections in Modesto.

“I’ve been doing some inspections on bank repossessions, and they’ve been in pretty bad shape,” Irion said. He’s seen walls kicked in, appliances removed and recyclable metals such as copper, steel and brass pulled out.

While damage is visible, Irion said other problems may be tougher for the untrained person to spot.

Example: Toxic mold hidden behind a fresh coat of paint.

“It’s easy to go into a bathroom and paint over past troubles,” Irion said. And even if a potential buyer sees mold, “there’s no way to tell just by looking whether it’s the type that’s toxic or just ordinary mildew.”

Irion said bidders would be wise to arrange for home inspections before committing themselves to buy.

CHECK FOR MELLO ROOS FEES — Many newer homes are in special taxing districts that require owners to pay additional property taxes each year.

Such Mello Roos fees or community service district fees can add thousands of dollars a year to the cost of a home.

BEWARE BUYING RENTAL HOMES — Few investors are able to buy homes, then immediately rent them out for a profit.

“The rental market is soft right now,” Elving said. “You have to offer very aggressive rental rates to get homes rented. If your price is above $1,000 (rent per month), you’re in trouble.”

Paula Leffler Zagaris, who runs Liberty Property Management, said rental homes should be considered long-term investments.

“Real estate is a great buy if you can hold onto it long enough,” Zagaris said. In the short term, however, investors should be prepared for a negative cash flow because rents likely won’t cover mortgage expenses.

“If you’re willing to offer the home at a fair market price and not try to gouge people, then you can find good tenants who will rent it,” she said.

FORGET FLIPPING — A couple of years ago, many investors made big bucks buying fixer-upper homes that needed relatively minor remodeling. After quickly making upgrades, they would resell the homes for far more than their expenses.

That’s called flipping a house, and it works great when the real estate market is hot.

Not now.

“Flipping is financial suicide now,” Elving warned.

That’s because buyers these days expect bargain prices, and they no longer have to pay extra for homes in great condition.

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