Because I often see these infomercials running on weekend mornings and obscure night hours, and I often get asked what is buying a home at one of these auctions like, I thought I'd write a little about what I know about them.
My father in law went through the home auction process in the spring of 2008 out in Las Vegas when he tried to buy a home through USHomeAuction.com, the process was comical. His bid was accepted, however when the bid was presented to the bank (Countrywide) they balked and then countered to a higher sales price, which he accepted, paid for an appraisal, etc. and then finally when the bank who was doing the new loan (also Countrywide) got around to doing a verification which should have been addressed during the pre-approval stage, it failed, then they were denied their loan, and fortunately were able to back out and eventually got their earnest money back. I didn't know much about the auction at that time other than reading what was on the website, so I didn't know what really goes on.
I suspect what these home auctions are is a way for banks to get top dollar for their homes, it is not specifically designed for the buyer to get a smoking deal. When your offer is accepted at the auction it does not mean that the seller has accepted your offer, it just means that no one else at the auction bid more than you did. Your offer is now presented to the seller (the bank who owns the home) and if they determine it meets their minimum required amount then you get to buy the home for that price - this isn't much different than making an offer on a bank owned home that is listed on the MLS which your real estate agent can take you to see, plus you give up a lot of rights in the mandatory purchase agreement the auction houses use. However if they think the accepted bid is too low, they will counter the buyer back for a more beneficial (to the seller) offer. Further in a lot of situations there is a "reserve" amount that has to be met, meaning if a certain sales price isn't met it'll be denied at the end of the auction or in some reported situations there are actually "straw bidders" or "shills" who appear to only bid after it appears no other bids are being placed, creating the illusion as if people are wanting to pay higher prices and "rallying up the crowd". One person even observed one of these people winning, and then that same property being re-auctioned later on because the buyer wasn't able to qualify.
You also will want to make sure of the qualifications one has to meet in order to bid - is the bid open to anyone who can plunk down the initial $5k or do they actually need to be pre-approved in order to bid? If they aren't required to be pre-approved then non-approved individuals are jacking up the price of the home you want to buy every time they bid.
If you buy a home at an auction, make sure it is an "absolute auction" or "no reserve auction", where no minimum bid is required to be met and the highest qualified bid wins. I am aware Freddie Mac does these from time to time and if you search your local area you can find them advertised as well.
In any auction you want to do your own research before bidding on the home, usually you will know what homes will be auctioned off ahead of time so you should check each home out carefully, perhaps hire a home inspector for a day even, and the homes you really really want you should pay $350 (or however much) for an appraisal to determine what the fair market value is... and then with the appraisal & insight from your home inspector, you'll know exactly what your max bid on the home should be.
Lastly, check out this article in my local paper about a family who is suing REDC (USHomeAuction.com), http://mortgage.freedomblogging.com/2008/06/20/foreclosure-auction-firms-accused-of-bait-and-switch/.
Shane Milne
Loan Officer
Banner Mortgage
949-273-4161 phone
www.thebesthomeloans.com
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