As sales and prices dropped nationwide in 2007, auctioneers’ revenue for home sales rose 5.3 percent to almost $17 billion, according to the National Auctioneers Association in Overland Park, Kansas.
Sellers and buyers used to find each other on the local multiple listing service; now they’re increasingly striking deals at the auction block.
Most home auctions these days are reserved for “distressed” properties or bank-owned foreclosures. The term distressed can mean homes that are in some stage of the foreclosure process. It can also refer to short sales, where the home is sold for less than what the seller owes on the mortgage. Because distressed property owners are often burdened with debt, many of these homes are abandoned or in disrepair.
Still, even developers are turning to auctions to sell brand-new homes.
But not all homebuilders believe in auctions. KB Home, a national builder based in Los Angeles, Calif., has avoided auctions altogether. Instead, the company hopes that building smaller, cheaper new houses will be enough to spur buyer interest. At its Wildomar development in Riverside County, called Monticello II, the developer recently introduced a smaller floor plan with three bedrooms and two bathrooms and approximately 1,800 square feet of living space that carries a price tag of $249,990. Although real estate auctions are standard in Europe, Americans tend to view them as “distress” sales. But when a builder needs to move the last few houses in a development, an auction can be a shot in the arm.
At auctions, the starting bid is made by the lender, sometimes for the amount that is owed, sometimes for less. At a public auction, the successful bidder usually must immediately present 5 or 10 percent of the purchase price as a down payment in a cashier’s check or cash. The balance, which is usually financed by a lender, is due on the closing date in 30 days. If no one meets the minimum bid, the bank takes its loan back, and in most cases tries to sell the property through a real estate broker.
In most states, a public auction also occurs as part of the foreclosure process. This auction is not controlled by the lender, but mandated by state law. These foreclosure auctions can be complicated, and they tend to be a game played by experienced and professional investors. In California, for example, after a lender completes the legal default proceedings, which takes approximately 120 days, a trustee typically auctions foreclosed properties on the steps of the county courthouse. There are few — if any — opportunities to inspect the properties, and buyers must pay in full, in cash. Moreover, sellers do not have to guarantee that the title is clear of liens or other mortgages encumbering the property.
At public auctions that are conducted by the lenders after they repossess a property via foreclosure, however, many of those problems are eliminated. Private auction companies frequently allow buyers to inspect properties prior to the auction date, and they guarantee title insurance as well. And most importantly, auction companies arrange for lenders to be on site to finance the deals, so buyers don’t have to pay cash for the full price. Auction companies often charge a 5 percent fee, or commission, of the sales price of the home being auctioned, and higher commission on the sales of additional homes.
Real estate foreclosure auctions are a great place for investors and homebuyers to find bargains. Home foreclosure auctions can be found on RealtyTrac, with thousands of real estate home auctions posted on the website.