"While many potential buyers view it as an opportunity to scoop up the 'deal of a lifetime,' that’s not always the case."
During the height of the housing downturn, the term auction usually referred to a foreclosed piece of property sold to the highest of many jostling bidders on the local courthouse steps. Typically, there was no chance for a preview of the property, little time for due diligence, and the requirement of full and immediate payment upon acceptance of the winning bid.
Opportunities Online and On-Site
With a steady recovery underway, this scenario is taken over by auctions of a more traditional sort, both on-site and online. And smart investors are finding lots of opportunity.
Properties are often sold at auction to close a transaction quickly. For some homeowners, this may be due to a foreclosure, desire to get money fast or because of a life-changing event such as a divorce, bankruptcy, or job transfer. For others, including an increasing number of real estate investors, it’s just another among varied vehicles for buying and selling a property.
Purpose of an Auction
The goal of a real estate auction, as with any other, is to drive interest in – and therefore the selling price of – the item up for bid, in this case, residential investment property.
While many potential buyers view it as an opportunity to scoop up the “deal of a lifetime,” that’s not always the case. Sometimes, the reserve price (or minimum that the seller will accept) is set nearly at market value, so the winning bidder ends up buying closer to retail than wholesale. Still, there are deals to be had, so it pays off for the savvy investor to keep an eye out for auctions with properties that look worthwhile.
We spoke with several experts in the field to explain the process and provide some pointers to help investors who are new to buying real estate at auction. As with any other investment opportunity, it’s essential you do your due diligence to ensure the auction company or website, as well as the property, is right for you.
1| Finding a Real Estate Auction
You can buy properties on-site, in person or online in the comfort of your easy chair. They’re not hard to find; advertisements abound on roadside billboards, TV, radio, newspapers and other periodicals, mailers, and the internet.
RealtyBid.com, which conducts online auctions via its website, offers a free email alert system. Simply sign up and the company will email you about new listings based on criteria you provide.
2| Before the Bidding Begins
“Before bidding on any property, no matter which type of auction, it’s advisable to have financing in place in the form of cash or a credit line,” says Tim Brewer, a master auctioneer at Crye-Leike Auctions in Hendersonville, Tennessee. In fact, many auction companies require the financing be in place.
“It’s not a good idea to buy a property at auction using a mortgage lender because there may be contingencies,” he replies. “You’ll probably be required to put down a large deposit (approximately 10 percent of the bid amount) as earnest money, which in most cases is non-refundable.”
Bidding requirements vary. “Paramount Realty USA often requires bidders to purchase a due diligence package in advance and bring a certified or cashier’s check to the auction in an amount equal to 5 to 10 percent of the property’s value,” says Misha Haghani, Esq., principal, Paramount Realty USA, New York, New York, which does live and sealed-bid auctions.
Due diligence material includes everything a buyer needs to know in order to make an informed decision. Such as the home’s square footage, information regarding the school district, homeowners association and covenants, a recent title report and appraisal survey, and a copy of the actual purchase agreement the winning bidder will need to sign.
“The goal is to provide as much information as possible to potential buyers before the auction in order to have an informed group of bidders,” Haghani says.
For auctions at RealtyBid.com, you must first register (for free) on its website with a credit card to confirm your age to purchase real estate. It also helps to protect against spam registrants, says Daphne Shannon, vice president of marketing for the Rainbow City, Alabama company.
Other auction companies may require registration with a credit card with a specific monetary authorization ($2,500 is typical), or they may ask you to provide “proof of funds.”
3| Do Your Homework
A property is advertised approximately 30 to 90 days before an auction date. During this time, do some homework on the property. “Ask lots of questions and attend open houses to get an understanding of the terms and conditions as well as the auction process,” advises Scott Shuman, partner, Hall and Hall Auctions, in Eaton, Colorado. Hall and Hall Auctions hosts live auction events with an online component when applicable.
Find out if the seller will furnish a general warranty deed and title insurance. By getting an insured title, you can be sure all liens are clear. Inspect the property with someone who has expertise in this area. If renovations are necessary, find out how much it would cost to make them. Ask a real estate agent to pull comparable sales to help you figure out a property’s worth in its present condition and its value after it’s renovated.
Typically, auctioned properties are sold “as is.” “This means that all provided information is believed to be accurate but is not guaranteed,” Brewer explains.
4| The Bidding Process
There are two common types of auctions. At an absolute auction, the property is sold regardless of the final bid amount. At a reserve auction, the seller reserves the right to accept or reject the highest bid if it does not meet the reserve price, explains Rick Sharga, executive vice president, Auction.com, Irvine, California. They offer both online and on-site auctions.
When an on-site auction begins, raise your hand or nod your head to place a bid. As bidder participation slows, the auctioneer will reduce the bid increment until a final bid is made, Sharga says. If it’s a sealed-bid auction, you’ll submit a written offer by the bid deadline, often with a certified or cashier’s check. The highest bidder gets the property. At RealtyBid.com, a seller sets a reserve price and time frame for the auction, says Shannon. Property information is displayed on the bid page, along with all bids and the internet transaction fee. Bidders can enter a maximum bid by using a tool called BidAssist. A countdown clock tracks how much time remains in the auction.
5| Paying for the Property
“After placing a winning bid, the buyer signs a sales contract with all of the important information, such as property condition exemption, lead-based paint disclosure and so forth,” Brewer says. The closing typically takes place in 30 to 45 days. This gives the title company, surveyors, lenders, etc., time to compile all of the closing documents.
For the closing, the buyer goes to the office of an attorney or closing agent to make the final payment, sign final paperwork and get the keys to the property.
Buyers must typically pay in cash, Haghani says. This means they are permitted to get a mortgage but must close on the purchase by the closing deadline or risk losing the deposit paid at the auction. When someone buys a property on RealtyBid.com, he or she will need to sign and return the purchase agreement, provide proof of funds or a pre-qualification letter and give a deposit check (in the amount shown on the property’s bid page during the auction). The buyer makes the remaining payments at closing.
Many auction companies add a “buyer’s premium,” or upcharge (typically 5 percent of the winning bid) to the purchase price.
-This is part one of a two-part series. Part 2 was published on December 1, 2017.