Going once, going twice, sold to the highest bidder — usually. With the large number of home foreclosures dominating the news, opportunities for big savings at home auctions flash before the hopeful eyes of many first-time homebuyers. And, although there are plenty of deals to be had, it’s important to do your homework before raising your paddle.
Once a bank takes back a property,  and generally after attempts to sell it directly have failed, banks may assign its sale to an auction house — usually as part of a group of homes.
“Those auction companies will then conduct what’s usually a ballroom auction at a hotel,” Sharga said. “Usually in those cases, the homebuyer will have the chance to go visit the property, perhaps during an open house. The banks have already cleared title on the properties and made sure there were no other outstanding financial problems, so it’s a lot safer situation for a buyer. Usually at the auctions themselves, there will be some lenders participating who might even be able to get them loans right on the spot.”
Commercial auction houses hold three types of auctions. The most common is the reserve auction, in which the seller has a price in mind but does not publish it. The seller can accept, reject or counter any bid, even the highest one. In absolute auctions, the highest bid wins. The third type is a minimum-bid auction, which entails publishing the minimum amount a seller is willing to take for the house.
But how do you decide which house on the auction block is the right one for you? You need to plenty of research ahead of time.
“The same rules that would apply when you’re purchasing a home on the traditional market apply when you go to a bank-owned real estate auction,” said Crystal Wright, a spokeswoman for auction firm Hudson and Marshall.
Browse the homes available through the auction and then go see them, she said. “You should never bid on anything you haven’t seen,” Wright added. “If anybody is encouraging you to do that, you need to run the other way.”
Because auctioned homes are sold as-is, take an inspector and a contractor with you to estimate the cost of fixes or changes you would want to make, Sharga said.
Next, Wright said, find out what houses in the neighborhood are selling for and find out how long the home was on the market before it went to the auction house.
“By the time you get to a real estate auction … it’s not unusual that you could expect a 20 percent discount on the last list price on the home,” she said, adding, “This is not a guarantee.”
Though real estate agents are not needed for auction sales, “it probably wouldn’t hurt to work with a Realtor if you’re a first-time homebuyer to get a better idea of what that actual property should be [priced] to make sure you’re actually getting a good bargain,” Sharga said. “Just because a property is selling for less than it sold [for] last time doesn’t necessarily mean it’s a good deal.”
Lastly, get prequalified for a loan so you know how much you can bid, Wright said.
See something listed that you love? Don’t wait for the auction. Many firms allow buyers to make offers directly to listing agents or lenders before auction day.
Don’t be intimidated by auctions, said Todd Gladis, vice president of client management at Real Estate Disposition LLC. About 75 percent of the people who attend REDC auctions are first-time buyers, he said. “It truly is what we call here a perfect storm for a first-time buyer. You’ve got a motivated seller, you’ve got excellent financing and you’ve got the auction, so it really works to the advantage of the first-time buyer.”

Court house auctions: Risky business

Before a bank fully takes back a property there is a type of auction that is actually part of the legal foreclosure process, said Rick Sharga, senior vice president of RealtyTrac, which tracks and aggregates foreclosure data nationwide. The rules differ by state, but this kind of foreclosure auction typically takes place at a courthouse or at the property itself and is conducted by a trustee or by a sheriff. Buyers do not get to inspect the property, and they must pay cash on-site - either the full amount of the price bid or a percentage with a deadline of 24 to 48 hours to pay the remainder.
Other risks are involved, Sharga said. For instance, if the house has other outstanding liens against it, the new owner could be responsible for them. “Because of the risks, we tend to encourage first-time homebuyers not to take a look at those auctions as the primary way of buying a foreclosure property,” he said. “It’s very easy to wind up with more problems than you anticipate.”

Smart auction buying

There are deals to be had. The average discount on market value at an auction of bank-owned properties is usually about 10 to 20 percent, industry experts estimate.

You can inspect in advance. Just like an REO purchased directly from a lender with the aid of a real estate agent, buyers can inspect the auction properties before bidding. But the properties are sold “as is,” so prospective buyers should inspect carefully, ideally with the help of a professional.

Deposits are typically non-refundable. Hudson & Marshall, which recently auctioned nearly 200 homes in D.C., Maryland and Virginia, required winning bidders to make a cash or certified check deposit of $2,500 for each property. But the company cautions on its Web site that the down payment will be lost unless the bidder secures financing for the deal and closes within 30 to 45 days.

The sales are not contingent on financing. That means even someone who is preapproved for a mortgage is taking a risk. If he loses his job or incurs a major debt, such as buying a car, before a deal closes the lender may not approve the mortgage and the deal will fall through.

Auctions often charge a buyer’s premium. Expect to pay an extra 3 percent to 10 percent to cover the company’s fees and marketing expenses. Check ahead and factor any premium into your costs.  — Noreen Seebacher

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