Going...Going...Gone...to a Real Estate Auction

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The increase in foreclosures over the last years has created stockpiles of properties on banks’ books. In order to help liquidate these properties, some lenders have resorted to an old fashioned methodology to sell these homes. Selling real estate via auction is a methodology that has typically been reserved for estate sales and during sellers’ market when high demand can create bidding wars. In today’s economy, banks and their auctioneers attempt to create artificial demand to get top dollar for their homes. If you are thinking that a real estate auction is a good way to pick up a cheap property, there are some things you need to be aware of.

Absolute Auction vs. Reserve Auction. The most important factor to be aware of in an auction is the type of auction you are attending. An absolute auction is an auction where the property sells for the highest bid. A reserve auction is an auction where the winning bid is subject to bank approval. The result is an auction that is inconclusive at the end. Absolute auctions are the best auctions to attend but are the least common. The most common auction for real estate is reserve auctions because most lenders or auctioneers aren’t willing to start the bidding at the reserve price because the higher the starting bid the fewer the number of bidders. If you attend a reserve auction, you need to be aware that a winning bid does NOT guarantee you will be purchasing the property.

Buyers Premium. If you are the winning bidder, the price you pay to purchase the property is typically 5% above the winning bid. The premium that is paid to the auction company is to help pay for the auctioneer who calls the auction and his assistant who typically gets the crowd stirring by using a pseudo-cattle call. If you’ve never been to an auction, it’s cheap entertainment unless you win the bid. In that case, the entertainment cost an extra 5%.

As-Is. Real estate auctions are almost always auctions for as-is properties. An as-is sale means that the seller will not complete repairs and that the property is transferred in the current condition. In a typical foreclosure sale, the lender in as-is transaction will complete repairs if the buyer’s lender requires repairs as a condition of the loan. In an auction, the property is sold in the same condition as on the day of the auction.

Just like any transaction, it’s important to do due diligence before purchasing a home at an auction. A good real estate agent will be able to help you look at a home and all the factors that influence the quality of the asset. A real estate auction can be a good way to get a great deal on a home but you want to make sure that you do all your homework with a real estate professional’s help.

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