Bank-Owned Auctions: Practical Bidding Strategies

“This is the third and last call,” said auctioneer Ross Dove, chairman of Dovebid, his staccato voice reverberating in the cavernous Pomona Fairplex convention center in Pomona, Calif. “Are we all in? Are we all done? Going once, going twice, going three times — sold for $565,000.”

In two frenetic hours, some 70 bank-owned foreclosure properties had changed hands among a crowd of 500 — as well as another 100 Internet bidders sitting comfortably in their homes — searching for bargain-basement prices in Southern California’s distressed real estate market.

Properties were flying off the block. Opening bids ranged from $65,000 — for a small, run-down, two-bedroom house in Hemet with1,200 square-feet of living space — to a newly-built, 3,100 square-foot, four-bedroom model home in Ladera Ranch that sold for $705,000.

Lender Auctions
“We’ve had over 400 pre-registrations,” said Michael J. Davin, co-founder of CataList Homes Inc., an upstart real estate discount brokerage in Hermosa Beach, Calif., and host of the auction earlier this year. “It looks like we are going to have a good day.”

Investor Mike Qutami had a good day.

Qutami bought four bank-owned foreclosure properties in Riverside County at the Pomona auction. One of the properties Qutami purchased was a three-bedroom home with two bathrooms for $140,000 — 47 percent below the previous listing price of $267,500. The home, built in 2006, was owned by American Home Mortgage. All the properties Tommy purchased were on cul-de-sacs.

“I think I got a good deal,” said Qutami, a licensed commercial real estate agent. “This is the first time I’ve attended an auction. I spent about a week driving by the properties and inspecting about 10 homes that I was considering bidding on, and I eventually bought four.”

Qutami said he spent $770,000 on the four properties.

Upon placing his winning bids, Qutami and other winning bidders proceeded to financing tables in the rear of the auction hall, which was administered by Countrywide loan representatives.

“The typical financing for an auctioned home is 5 percent down, with a fixed-rate conventional loan,” said Lisa Harding, a senior vice president with Countrywide who was present at the auction along with six loan officers. “Investors usually do a hybrid adjustable rate mortgage (ARM).”

But whether Tommy and other homebuyers are in the forefront of the latest real estate trend depends upon who you ask, where you live, what the terms of the agreement are, and how you examine the data.

One thing, however, is for sure. Foreclosure auctions are on the rise.

Foreclosure Auctions Trending Up
With hundreds of thousands of properties entering the foreclosure funnel each month, auctions firms are busier than ever. As lenders and homebuilders repossess more foreclosures, they hire more auction companies to find buyers. The fastest-growing segment of the auction industry was live real estate auctions, which surged 47 percent from 2003 to 2007 and generated $58.4 billion in sales last year, said Chris Longly, a spokesman for the National Auctioneers Association, a Kansas-based trade organization that represents 6,000 auctioneers.

Longly said the boom in foreclosures has meant an increase in opportunities for auction companies like the Real Estate Disposition Corporation of Irvine, Calif.; Hudson & Marshall, a Dallas-based auction firm; Kennedy Wilson Auction Group of Beverly Hills, Calif., Dovebid of Foster City, Calif.; Williams and Williams and many other auction firms.

Not only is the number of auction transactions trending upward, but new players are entering the auction business. With a growing number of sellers looking to put their foreclosures on the auction block, real estate companies are now getting into the auction business, competing with traditional auction firms. CataList Homes is the newest entrant. Sotheby’s, Prudential, Coldwell Banker and other real estate brokerages are also launching real estate auction divisions to tap into this growing sector.

“Buyers are becoming increasingly interested in buying foreclosures through auctions,” said Tommy Williams, president of the National Auctioneers Association and co-founder of Williams & Williams, a Tulsa, Okla. auction firm.

As housing prices continue to drop and mortgage foreclosures reach staggering levels, public auctions like the Pomona one and others around the country are luring investors and first-time homebuyers looking for bargains.

“Auctions are a great place to find foreclosure bargains,” said Tim Adams, a real estate broker and licensed auctioneer in San Bernardino, Calif. “I’m a proponent of auctions, but the guiding rule is that buyers need to be thoroughly prepared and they have to do their homework.”

Although auctions can be a good way to buy a home, Adams said buyers should research the properties first and proceed with caution. Indeed, he added, would-be bidders hoping to buy foreclosure property at an auction should know the type of auction he or she is attending and the terms of the sale.

Adams, who works in Southern California’s Inland Empire, said auction buyers must be aware of the pitfalls associated with foreclosure auctions. Some auctions, warned Adams, often do not include contingencies for inspections, sale of another property or getting financing. He also suggested teaming up with a real estate agent.

But not everyone is convinced that auctions are the best place to buy foreclosures. Several real estate insiders consider foreclosure auctions a game between auctioneers, banks, builders, brokers and buyers.

“As an investor, I don’t feel comfortable with some of the auction companies,” said Joseph Tammaro, a New York real estate agent and foreclosure investor from Brooklyn, N.Y. “I’m not fond of some of these firms. They are just massive flipping machines. They are misguiding people. These auctions are high-pressure situations, where they prey on immigrant buyers at the bottom of the market. Many buyers get sucked into the bidding process.”

Tammaro and other experts advised investors and homebuyers to evaluate who is conducting the auction and to determine if it is a true auction. He believes the best foreclosure deals are not found at foreclosure auctions — but at the courthouse steps and in the pre-foreclosure phase.

Absolute or Reserve Auction?
There are other quirks involved with buying at an auction. The CataList Homes auction in Pomona was called a “reserve” auction, meaning the seller has the right to turn down the highest bid. The highest bidders need to meet or exceed an unpublished reserve price determined by the seller. If the highest bid falls below the reserve price, the seller can accept the offer, provide a counter-offer or reject it. In an “absolute” auction, on the other hand, the highest bidder is assured of getting the property.

To get into an auction and obtain a bid card, buyers generally must register before entering the auction (or on-site) and bring a certified or cashier’s check (made payable to themselves) for $5,000 to $10,000, depending on the property and auction company. Generally, winning bidders have to immediately come up with a 5 percent earnest money deposit on the purchase price of the property, plus a 5 percent “buyer’s premium” (commission). Investors buying more than one property need to shell out even more cash — both in cash deposits or higher interest rates for financing.

Despite some of the hurdles involved, more and more buyers are snatching up properties at foreclosure auctions, according to Dave Webb, principal at Hudson & Marshall, which sold 9,000 units last year, and is scheduled to sell 18,000 foreclosure properties this year. 

“I think it’s a good time to buy,” Webb said. “Everything runs in cycles. In the late 1980s, Houston looked like a ghost town because of the oil bust. It looked like what Detroit looks like now. Now homes that sold for $30,000 are selling for $100,000. Eventually all markets do come back.”

Buyer Beware: Watch Out For Shill Bidders
Dr. Thomas Musil, a real estate professor at the University of St. Thomas in Minneapolis, Minn., warned that some auction companies place their own bidders — sometimes called shills — pretending to be interested buyers in the audience in order to lure others into bidding higher and driving up the price. The use of shill bidders, which is illegal in some states and tolerated in others, is unethical if not disclosed in the auction materials, Musil and other experts claim. Bidders, Musil argued, should know if the person who is bidding against them is really a legitimate buyer, the actual lender or a shill.

To avoid unscrupulous real estate auction companies, Musil advised to look for auctions that are sponsored by licensed real estate brokers and have information about the property available to prospective buyers before the auction — both online and in printed materials. Look for auctions that will allow bidders to be represented by their own real estate agent or attorney. Be cautious at reserve auctions and seek out absolute auctions.

Ramsey Su, a real estate investor from San Diego, advised against thinking that all foreclosure auctions are filled with deals.

“I see an unprecedented deterioration in the real estate market right now,” said Su, a former REO specialist and licensed California broker. “I have worked in three real estate cycles and have never seen the estate market so bad. My advice to foreclosure investors — and even first-time homebuyers — is to wait for the next auction. Why buy now? I just don’t see how the system is going play out yet.”

Su frequently attends foreclosure auctions in San Diego, but is reluctant to buy right now because he feels the market is still declining.

Back in Pomona, as the bidding prices went higher and higher, John Donaldson and Richard Thompson — an investor team from Los Angeles — kept their bidding cards down.

“The prices are too high,” said Donaldson, glancing at his partner. “The numbers are the numbers. If we can’t buy one for the right price, we’ll wait and go to the next auction.”

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