Return of the REO Auction

“It’s time to sell, sell, sell real estate in Southern California!” came booming over the loudspeaker as the auction of 92 foreclosure properties began in earnest. An estimated 1,800 prospective bidders packed the convention center’s concourse hall, watching expectantly as property photos flashed up on giant screens and properties were sold to the rapid-fire cadence of the auctioneer. A cadre of attractive women escorted the winning bidders back stage to finalize their purchases.

High-energy, aggressively marketed auctions like this one conducted recently in downtown Los Angeles are sprouting up across the country, signaling a significant shift in the foreclosure market.

“Sellers want to speed up the process. Some of these are new REOs, and have not been put on the market with a Realtor first. They’re sending them right to auction,” said Rob Friedman, chairman of Real Estate Disposition Corp, the company running the auction.

The comeback of auctions as a vehicle of choice for lenders to sell off their growing inventory of Real Estate Owned properties could be a good omen for real estate investors interested in finding bargains in the foreclosure market. The REO auctions represent a more sanitized method for purchasing foreclosures. To avoid getting caught up in the heat of moment and overbidding, prospective bidders should make sure to perform careful research of the property before the auction.

“Due diligence is always number one in anything. If you’re going to be a successful investor, you’re going to be driven by your willingness to plan and be an expert on the arena you’re investing in,” said Dean Williams, CEO of the Williams & Williams auction company.

Unlike the mass volume sales like the ones put on by REDC, Williams’ company prefers to conduct its auctions on site at the foreclosed property. At one recent Williams & Williams sale in south Orange County, Calif., for example, about 100 bidders showed up for the auction of a vacant 1,900 square-foot, three-bedroom, two-bath house with an opening bid of $100,000. After explaining the ground rules, the auctioneer began to bark the sale. Five minutes later the property sold for $650,000, despite some concern over potential soil or foundation issues expressed by many in attendance. A slightly larger comparable property down the street was being listed by a real estate agent for a price range of $719,000 to $799,000.

“I knew this was going to be crazy, but I had to see it for myself,” said investor Tony Del Rio after the auction. Del Rio usually attends trustee’s sales — foreclosure auctions that take place before the property is repossessed by the lender. “Until the market gets flooded you’re going to have people buying to live in the house themselves. Investors don’t want to participate in these bloodbaths.”

Both auction companies require bidders to come prepared with checkbook in hand. REDC bidders must come with cash or a check for $5,000 for each property they intend to bid on, as well as their checkbook to write a check for the balance of the 5 percent down required at the time they become the winning bidder. Williams & Williams charges $3,000 for security on vacant properties. The auctioneer accepts cash, personal check or cashiers check for the 5 percent down due at the time the auction ends.

Both companies emphasize that all properties are sold in “as is, where is” condition. Both allow prior inspection of the property up for sale, but it is up to the investor to inspect and pull whatever documents are necessary to research the property’s title and condition  before the sale — although title is sold free and clear of all prior liens and encumbrances.

“To be a successful bidder at an auction you have to get all the legal documents,” Friedman said. “We put them on our site 30 to 40 days ahead of time. Download it and read it. We provide it at the auction, but why not do it while you’re relaxed and can think straight? If you don’t understand something, take it to someone who does.”

If investors feel they need a second opinion, they can bring a property inspector, real estate agent or contractor along to check out the property during the inspection period. In the end, before attending the auction, investors need to determine how much they’re willing to bid on each property of interest, and then stick with that number.

“That’s how to become a successful bidder at an auction. Especially as an investor, the goal is to know your number and know what the profit margins you need are going in. It’s not an emotional thing, it’s just business,” Friedman said.

One key for investors to remember, Williams stressed, is that the auction company does not set the price properties will bring at auction, the market does.

Williams’ firm also conducts online auctions. The typical properties sold online tend to be lower-end properties that sell for $30,000 or less. The bulk of them sell to investors because generally homebuyers are not interested in those types of properties. But they are “the real deal. They are properties you can buy and reposition, rehab and provide housing for somebody who only wants to rent,” Williams said.

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