Home Auctions

February 5, 2008 7:07 PM

What kind of risks should I watch out for bidding in a housing auction?

I've looked at this thread already, but I'm looking for a list of the pitfalls to going to an auction. Obviously, foreclosed houses could have all sorts of problems.. but I saw an auction (for >50 homes) that advertised "inspection days" and listed financing available.. I was just wondering how they do this? Don't auctions usually demand 100% cash upfront, sight unseen, etc, etc? Are auctions becoming more mainstream or something?

posted by mhh5 to home & garden (5 comments total)

Any home sale requires that you pay the seller in full up front. You borrow the money from the bank, give it to the seller, and then pay the bank back over time. "Financing available" just means that they have a lender who they want you to use because the seller will get a commission.

Regarding inspections, auctions are usually about getting a quick sale rather than maximizing the price but they'll do what they can in the time available to get the highest price they can. So I'd expect that if time (and other circumstances, e.g. the property being unoccupied) allows then they'd have an inspection.
posted by winston at 7:32 PM on February 5

One pitfall that comes to mind: Check the "right of redemption" laws in your state. The homeowner may have a right to buy back their property within a specified amount of time (or not, according to your state laws). These rights may also be sold to another party.

A foreclosed property is usually not going to be a flip property, due to factors such as area, condition of the property, etc. It is a long term investment (and like any investment, it carries a risk, so don't invest any money that you can't afford to lose). If you're a novice, contact a real estate agent who specializes in foreclosures to get them to bid on a property for you. You can find one by driving around and noting down phone numbers on signs of properties which are listed as "Foreclosure" on the "For Sale" sign.

You'll need to be pre-approved up to a certain amount, unless you have the cash on hand (check with your bank or other local financial institutions). Be prepared to hang on to the property and spend money on making improvements and upkeep, etc. They are often ill-kept and stripped of things like cabinets and fixtures. If someone couldn't afford their home payments, they probably couldn't or wouldn't pay for the upkeep.

ALWAYS get a lawyer before you sign any documents and make sure the title is clear, doubly so with a foreclosed property. There may be a second mortgage holder or contractor lien so do your research before investing in this and hire a title company if it's not included in the deal.
posted by Marie Mon Dieu at 8:12 PM on February 5

It depends on the type of auction.

If you see advertising for an auction it's probably for REO (bank-owned, already foreclosed) homes run by an auction house. Actual foreclosure auctions are a different kettle of fish. You hear about those in the 'legal announcement' section of the newspaper. They usually happen on the courthouse steps and are considerably less consumer-friendly. Those might be the auctions you're thinking of. They vary according to state and local laws so what you've heard about them may be slightly different.

My wife and I went an REO auction over the Summer and actually won the bidding on one of the properties. There had been an inspection period a week before and we brought a contractor buddy along to look it over with us. It checked out and we decided before hand what we would bid and that's pretty much where the bidding ended-up.

The rules for that auction included having to put down 5% on the spot, and close within a certain period or forfeit the deposit. They had financing "partners" on-site but we had financing worked out before-hand. One gotcha was the deposit was 5% of the high-bid plus a 5% 'buyer's premium' that goes to the auction house, so the check we had to write was a bigger than we had expected (5% of 105%.)

It was very exciting, but ultimately fruitless... all sales were "Subject to Seller's Approval" and we left the auction sans our 5% but sans any commitment from the seller to sell it to us. A month and much hand-wringing later we got a phone call. The deal would only close if we went 25% above our previous high-bid. We said no and they returned our check. Oh well.

I looked up the land records for a few of the auctioned properties and the sales seemed to go through about 75% of the time. YMMV.

So read the auction disclosures and rules carefully and you should be fine. If it's a bigger auction house they should have a site that will detail the rules and contracts you'll have to sign. It also never hurts to run stuff past a lawyer.

On preview:
The auction we went to explicitly guaranteed a free-and-clear title. All redemption periods had passed and title had transfered to the bank so the relative risk was small. The auction house was Hudson and Marshall and they have tons of info on their site. It sounds like the op is talking about something along those lines.

The court-ordered foreclosure auctions are scarier. That's where you have to worry about lien precedence, redemptions and ultimately having to evict the previous owners. I doubt I would brave one of those with 3 lawyers and a ninja.
posted by EmptyK at 8:55 PM on February 5

Thanks, EmptyK! That sounds like the gotcha's I wanna look out for.. Seems pretty sketchy that the bank can demand 25% more.. and you lose your deposit/fees. That's so not cool.

BTW, how/where did you look up land records? Is there a convenient place online.. or is it a trip to city hall and down in some dingy basement where there are "computer" terminals from the 1950s?

I marked EmptyK's as the best answer, but thanks to all who've replied! I have some more research to do, it seems... :)
posted by mhh5 at 12:17 PM on February 6

Though it didn't say so in the big print, the small print made it clear that the 30 days to close was from the date the bank said yes... so our deposit really wasn't in jeopardy as long as our financing was solid.

About the records, here in Maryland they have a good system for it: The Maryland Department of Assessments and Taxation Real Property Data Search. DC has something similar and Virginia does it on a county-by-county basis. Google for your local real estate tax dept and you might find something along those lines.
posted by EmptyK at 2:34 PM on February 6