Prospective homeowners and investors are looking to snatch up bargains at auctions being held to sell lots of homes that have been foreclosed on by banks.  As you drive around many towns, you'll see the ‘auction' signs directing you to homes that are up for auction and when you get to the homes, there will usually be additional information on when and where the auction will be held.  Are there really bargains to be had?  Sometimes. 

At the auctions I've attended, auction companies will auction anywhere from 1 or 2 homes to literally hundreds of homes over a couple of days.  At the auctions, every home receives a ‘winning bid' which represented the highest amount offered that day.  However, these bids do not have to be accepted by the banks who are the sellers.

I always thought the highest bidder is the winner.  Well not quite.  There are different types of auctions.  An ‘absolute' auction is what I was thinking of.  These are where there is no minimum bid required and the highest bid price is what the home will sell for.  However, most auctions of bank owned homes are not ‘absolute' auctions, but rather, subject to the seller's (bank's) approval.  This means the bank will review the offer and let the winning bidder know in a week or two if they'll accept the offer.

The most recent auction I watched was last month and an agent friend of mine did successfully buy a home for $329,000 (including the buyer's premium, which I'll explain  below) in Brentwood that I feel is currently worth about $400,000.  So my friend bought this home for about $70,000 under market value, or around an 18% discount.  A good deal indeed, and he plans on renting it out.

At that same auction, I represented a client in an attempt to purchase a home in Antioch for $280,000 (including buyer's premium).  With my estimate of the home's value being $390,000, this represented a very nice discount of approximately 28%.  However, the bank declined that offer, asking if my buyer would consider increasing the offer to the mid-$300,000's.  That would make no sense for most investors.  We turned down their counter-offer.

Offer?  Counter-offer?  Doesn't sound like an auction, but more like traditional real estate sales where a buyer makes an offer and the seller responds to the offer.  And since most auction buyers are investors looking for the ‘screaming good deal' and the banks are trying to recoup as much of their loan losses as possible, I understand why most deals do not come together.

Of the 20+ homes that I tracked at that November 2007 auction, banks have only accepted about 15% of the highest bids to date, with most being declined.  I'd be surprised if more than 20% end up selling.  The auction company's literature states that over 90% of high bids are accepted by the banks.  This was definitely not the case at this auction, however, a few deals were successfully worked out.

There are many things to be aware of when buying auction properties. 

• The homes are sold ‘as-is', meaning that you are not allowed to ask for any repairs to be made.  The banks usually do not have any inspections completed, so it is up to the buyer to inspect the property as thoroughly as possible, including having professional inspectors look at the home if they want.  There are usually one to three dates within a couple of weeks of the auction date where you can preview the home.
• Most auctions require that you put down from 5-10% of the winning bid as a down payment.  Usually a portion needs to be in a cashier's check with the balance in the form of a personal check.  You can get traditional loans to purchase auction properties (unlike buying at trustee sales on the courthouse steps where you need the full amount in cashier's checks at the time of purchase).  However, at some auctions there is no contingency for financing, meaning that you have to know that you can get the loan.  If your bid is accepted by the seller, your deposit is at risk if you end up not getting your loan. 
• The auction companies make their money by either charging the sellers a commission to auction the homes or by charging the buyers a "buyer's premium".  Buyer's premiums are common in the auction industry, but somewhat foreign to the real estate industry.  A buyer's premium is a percentage of the winning bid that is added onto the bid amount to establish the final purchase price.  Buyer's premiums usually range from 5-10% of the bid price.  In the case of my friend, the winning bid was $313,000 and the buyer's premium was 5%.  This made the final price $328,650.  Make sure you take the buyer's premium into account when determining what to bid for auction homes.

While the best deals may often be turned down by the banks, there will be some deals for investors.  If a buyer is looking for a home to purchase and live in, this is a fantastic way to buy a home for 10-20% below its current fair market value.  If you'd like to be notified of upcoming auctions, please feel free to call or email me and I'll add you to my "Auction Notification List".