I have many clients, and also realtors like myself, looking at auctions as a potential way of finding properties under value. The trustee sale auctions which occur at the end of the foreclosure process seem to be frequented by professionals of the auction business who are able to pay cash for purchased properties. The average buyer does not have the knowledge or capital to compete at this level. And it seems these days, even the professionals are not buying homes like they once did, so lenders are being forced to take back homes as REO(real estate owned: properties now owned by a financial institution). These homes often come show up on the MLS once again and give buyers a chance to take the homes in as-is condition while possibly paying under market value.
Many REO homes do sell once they return to the MLS market, however, some do not. What seems to have happened is the banks have relied on real estate agents, real estate brokers, or appraiser opinions to determine a fair selling price, but those prices have been above what the market bears. Hence, after some time in the MLS without a decent offer, or directly after the trustees sale, the banks are enlisting a company like Real Estate Disposition Co. to generate public interest and get thousands of people possibly bidding on these homes. This public auction has a benefit for the average buyer compared to the trustee's sale since they require only a $5,000 cashier's check to become a registered bidder, initial deposit needs to be 5% of the purchase price, and there will be a 21 day escrow to procure financing. You are expected to have conducted all your inspections of the property during the open house times prior to the auction, and can be considered to be buying the property "as-is", so there is no 17-day or other contingency period that is typical on the resale market. In fact, if you are the winning bidder, and then do not close escrow, you may be liable to the seller for 3% of the sales price as liquidated damages.
The questions I pose are 1. Who is bidding on these homes and 2. Are they getting a good deal?
I recently attended one of the auctions to learn more. However, before doing that, I visited 3 of the homes up for auction and ran an extensive analysis to see if it made sense as an investor like myself to buy any of these homes.
Before I get into all the details, let me give a brief summary and say "knowledge is power". If you are considering purchasing an auction home, enlist the help of an experienced real estate professional like myself. My services don't cost you anything, and I can help you avoid costly mistakes!
Auction Date: May 12, 2007
3 Oceanside homes, 1 Carlsbad home
Address | Auction Sales Price | My Value | Current MLS Price or Rent | MLS Price B4 Auction | Repairs |
1156 Sunbright Ocn | $520,000 | $575,000 | $589-629k | $610k | Cherry floors, carpet, paint, blinds, landscaping |
4309 Deer Valley Ocn | $465,000 high bid | $550,000 | unknown | $545-579k | Had $10k tax lien, possible roof leak, enlarge backyard |
4306 Morgan Creek Ocn | $646,000 | N/A | $699-749,500 | $649-695k | Carpet, paint |
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6079 Paseo Carreta Cbd | $525,000 | $535,000 | $2350/m | $577,900 | Landscaping, flooring, paint |
Comments:
Sunbright
-bought by Carlsbad investor
-upgrades added: All flooring has been upgraded, including beautiful Schoen brazilian cherry wood in the kitchen, formal dining & living rooms, upgraded carpeting in the family room, upstairs bedrooms and spacious loft, and 16' tiles in the downstairs and master baths! Large windows throughout, all trimmed with window coverings, including Bahama Bay blinds. Epoxy coated garage floor. Landscaping with trees, mulch, and sod. Staged.
-this may have been an overimprovement for homes in the area and for a quick flip.
-biggest downside to this house is the backyard view is an empty field looking like a junkyard
Deer Valley
-this one will be up for auction again August 18, 2007
-are the tax lien and ceiling stains still issues?
-biggest downside to this house is the small backyard
Morgan Creek
-bought by California investor
-the market is tough right now for Oceanside homes in this price range and location. Based on resales in Arrowood and the attempt to sell the home prior to the auction with a $649k low end price, the current market value for this home may be $650k
Paseo Carreta
-bought by Oceanside investor
-turned into a rental property. Does that make sense? Let's look at the numbers: With 20% down, and a 6.5% interest only payment, the mortgage is $2250/m, HOA is $80/m, $445/m property taxes, $136/m mello roos taxes, and $50/m homeowner´s insurance for a total outlay of $2961. Not counting any tax benefits, that´s a negative cash flow of over $600/m.
So the idea that these auctions might be giving an owner-occupied buyer a chance at a bit of a price break does not seem to hold true in these 4 examples. And did these investors really do their homework to know what they were buying and the potential for profit or have they been watching too much "Flip This House" on TV?
The next auction by this same company is Aug 18, 2007. It will be held at the San Diego Convention Center again, and I'm sure there will be a couple thousand people in attendance. What can you expect? A lot of lookie-loos. I think last time maybe only 20% were probably registered bidders, and of those, a couple hundred seriously ready to make offers. You'll find the auctioneers create a lot of noise during the bidding, including a continuous clicking sound. Runners will come and negotiate with bidders to drive prices higher. I guess this has some psychological effect to prevent you from thinking clearly and hopefully will get you do things you otherwise wouldn't. Immediately after the final bid has been accepted, the winning bidder must get "pre-qualified" but the auctioneer's lender and be prepared to write a check for a 5% deposit. Last time, about 15% of the properties had to be re-auctioned because the winning bidder did not qualify. The next time around on the auction, it amazed me to see some of the properties actually ended up selling for more than first time!
Yes, everyone is looking for a deal these days, but I feel these auctions can prey on the uneducated and uninformed. Caveat emptor, or buyer beware!
Certainly there will be more of these types of auctions in the future. For example, this time around there are 13 Oceanside properties, and 1 in Carlsbad, so about 4 times the amount compared to last time. You can even see individual owners or listing agents attempting similar auctions, but without much success. Most don't meet the reserve price due to lack of interest, or buyers expecting ridiculously low prices....just like the starting bid amount that REDC utilizes.
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