The Quick and Easy Guide to Real Estate Auctions Table of Contents I. The Basics.................................................................................................................................... 1 a. What is a Real Estate Auction? b. What Type of Properties are Sold at Auction? c. The 3 Main Property Auctions d. Benefits to the Seller, Buyer and Realtor e. What You Need to Know II. How Do Real Estate Auctions Work?..................................................................................... 7 a. Seller's How-To b. Buyer's How-To III. Pros and Cons of Buying a Foreclosure................................................................................ 11 a. Missed Payments/Motivated Seller b. (NOD) Pre-Foreclosure/Notice of Default / Lis Pendens c. Foreclosure Auction d. Post-Foreclosure Bank Owned Property REO IV. Tips for Winning, Mistakes for Losing.................................................................................. 14 a. 10 Mistakes to Avoid b. Tips on Bidding
The Basics Most people go the traditional route when buying homes. They speak to real estate agents or begin negotiations with a seller. However, there are a select few who choose to go to real estate auctions for their new homes. Perhaps real estate auctions aren't for everyone. But if you do your research, you have a good chance of making the winning bid on a great property for a low price. What is a Real-Estate Auction? A real estate auction is the public sale of properties. This method of purchasing homes used to generally be limited to real estate investors and business professionals. Nowadays, it's normal for anyone to attend a real estate auction and start making bids. Homes can be up for auction because of a number of reasons. Here are the most common: • • •
The homeowner owed enough money for the government to reclaim the house and sell it. Repossessed homes that the bank wants to sell to recover the money it originally loaned. The house has been foreclosed.
Looking for real estate auctions is easy. Try newspaper ads, simple online searches, trusted websites and local auction houses. Auctions can be held in a number of places: conference centers, auction company offices, local courthouses and sometimes even in the backyard of the estate. Some of these auctions are also held online. One of the best and most reputable places to bid on real estate is BNO.com. Besides its sheer simplicity, there are many benefits to buying and selling property via BNO's website. What Types of Property are Sold? For the most part, any type of property or asset can be sold at auction, yet most of the home auctions you hear about are foreclosures. It depends on the state, but a trustee or an officer of the court will perform a foreclosure sale to regain the balance of a loan borrowed from someone who has defaulted on their mortgage payments.
Non-distressed properties at auctions are definitely on the rise. This includes luxury homes assets like office buildings, hotels and apartment buildings. Three Main Types of Property Auctions • • •
A reserve auction – the reserve price is not known. If the highest bid does not meet the reserve, the lender has the right to reject your offer A minimum-bid auction – where the bidding begins at a specified price An absolute auction – the highest bidder wins
The beginning price of payment may be the balance remaining on the mortgage, or a lower amount just to pique the bidder's interest. The lender can't profit from a foreclosure auction and the properties are often sold at less than the market value. Payment Buyers who plan to bid on a property should prepare themselves to pay for the property at the auction. Come with a cashier's check with the amount of money the person holding the auction requires to complete the transaction. Winners of the auctions must go through a property closing, similar to a traditional real estate transaction. Also, there are always accompanying auction fees. Bidders Be Cautious Don't forget that a lot of properties are at auction because the homeowner has had troubles. There could be maintenance issues with the home that need to be addressed and other houses could have fairly outdated interiors. Be sure to find out if there are any liens against the home. A lien is a legal document that acts as security for a debt by giving the creditor a stake in the home. It's a right to keep possession of property that belongs to another person, until a debt owed by that person is removed. Research the home's title thoroughly before you bid and work with the auction company holding it. Lastly, be sure you can pay for it. Steep penalties await the person who withdraws their winning bid. Seller, Buyer and Realtor Benefits of Real Estate auctions
Benefits to the Seller: • • • • • • • • • • •
Buyers are ready to buy Reduction of long-term carrying costs (such as taxes and maintenance) because of quick disposal Certainty that the property will be sold at market value The property is exposed to a large number of pre-qualified prospects Accelerated sale Auction price often exceeds the price of a negotiated sale due to competition among buyers Potential buyers must pre-qualify for financing The seller knows the exact date of sell Fewer home showings The seller is removed from the negotiation price Ensures an aggressive marketing program that increases interest and visibility
Benefits to the Buyer • • • • • • • •
Smart investments are normally made as the purchase is usually at a fair market value The buyer knows that the seller is committed to sell Multi-property auctions allow the buyer to see many offerings in the same place and time Buyers alone decide the purchase price No more long negotiation periods Closing and purchasing dates are known Buyers understand that they are competing fairly and with the same conditions as other buyers Buyers receive info on property via due diligence packet
Benefits to the Realtor • • • • • • •
Clients and customers are offered new selling and purchasing choices Revenue and market share increases Your own market niche Certainty that the property will be sold at market value Property is sold quickly The property is exposed to many potential purchasers Successful auctions bring in more business and referrals
What You Need to Know Purchasing a home at auction can be both fun and profitable. Some of the highest profits in foreclosure investing are through house auctions. In other words, there are plenty of opportunities for great deals. It's important to be prepared and informed before you attend the auction or cast your first bid. Here are a few things you need to know. Also, some of the rare, but worst case scenarios. These problems sound serious (and they are), but all can be easily avoided by doing the proper research and knowing what questions to ask. Right of Redemption The right of redemption is available to property owners in some states. It can be a real burden to investor's. Just imagine doing all of your research before the auction, battling with other bidders to submit the final bid, getting your finances in order and perhaps even repairing certain parts of the property, only to learn that the previous owner can get the property back. It's not common, but you could potentially find yourself in this position. You will receive a full refund for your bid amount, but you will lose any money you have invested into the home after the sale. Financing Payment policies vary, but usually you need to have a cashier's check for a portion of the sale price with you during the time of the sale. If you don't have it with you, sometimes you can't even be considered a qualified buyer. A deposit check is for at least 5-10% of the purchase price, other times it's a flat fee. The balance of the highest bid is due anywhere between thirty to sixty days after the auction, but it can also be just a few days after the sale. Problems with the Title Another obstacle is the state that the title is in and the condition of the property itself. As the highest bidder, you might find that not only do you have a new property, but also all of the debts and responsibilities that go along with it. This is by far the biggest risk when dealing with auctions that are forced by second mortgage lenders or other “junior� lien holders. Remember, the main lien holder has rights to the property. So, if a junior lien holder forces the sale, the primary lien is still in effect, even once the property has sold.
As an example, if you go to a foreclosure sale and make a bid – say around $10,000 – that garners you a great home worth $100,000, you might think you snatched an amazing deal. However, you could learn that the home has a $75,000 mortgage and $10,000 in liens attached to it. This happens to investors who don't do their homework. So... Research before the auction! Evicting the Homeowner Besides a pre-foreclosure deal, where you work closely with the homeowner and they cooperate, an auction sale might involve homeowners who are upset about leaving and may not want to leave the home. The eviction process can often be time consuming, particularly if the previous homeowner/s has an attorney who can drag the process on for moths. And of course during this time, you have purchased a home you have no access to live in. The Fever The “Fever” is not exclusive to real estate auctions. It can happen at any auction. The auctioneer chatters off words, other bidders anxiously jab their paddles in the air, the crowd “Ooos” and “Aaahs” over big bids - it's hard for some bidders not to get caught up in the frenzy. The last thing you want to do is spend more money than you planned or purchase a home you really don't know much about. If you're a serious impulse buyer, it might be a good idea to bring along a friend or an adviser to assist you. The most significant thing to remember when buying a house at auction, or buying any item at auction, is to do your research and be prepared. Find out as much as you can about the property/home beforehand.
How Do Real Estate Auctions Work? Sellers How-To It's normal to feel stressed on auction day. You can reduce some of the anxiety by knowing just how the auction process works. Usually, this is how real estate auctions will unfold... Before the Auction: An auction can go by quickly, therefore it's crucial that you and your agent have agreed on everything the day of the auction. Talk about how you want to handle reserve prices and if you will be making vendor bids through your agent. These kinds of questions are critical and have legal implications. The Rules: Around thirty minutes before the auction, your agent must display documentation regarding the estate. When the auctioneer starts, he will detail the information: state laws applying to the auction in general, rules applying to this particular type of auction, including whether a vendor bids and/or co-owner bids will be used. Auction laws differ in different states, so discuss this all with your agent. Opening Bids: The auctioneer will ask for the opening bid, setting an amount by which all bids must rise, like $5,000 increments. Other incremental bids could be accepted, higher or lower, but it's up to the auctioneer whether he will accept the bid amount. Going Once: When the reserve price is reached, the property is considered to be “on the market” and it will sell to the highest bidder. If the reserve price isn't reached the auctioneer will ask the seller privately if he wishes to lower the reserve. When the final bid is reached and the seller is happy with the price, the auctioneer will say “going once, twice, three times [pause] SOLD!” Money: A deposit of around 5-10% is required after the auction. The balance is paid on settlement,
which is made by the seller at 1-3 months. Being easy to work with in terms of the length of the settlement to suit your buyer can actually help sell the property. The sale is made final when the contract is signed by both seller and buyer and all relevant checks and transfers are finished.
Buyers How-To 1. Find Properties You should try your best to get accurate and updated auction information on a regular basis. Develop a system to keep track of properties that intrigue you. A good system is crucial. Successful auction buyers observe numerous properties over a sustained period of time. Once you find a property online, you should try to drive by the estate to see first hand the condition it's in and the neighborhood that surrounds it. Sometimes driving by could give you the opportunity to casually meet the owner or gain information from a chatty neighbor. 2. Confirm bidding process, location and auction status Once the property is up for auction, the owner has the opportunity to stop the auction from taking pace by paying the amount that's owed to the foreclosing lender. Auctions that are postponed sometimes do so without publishing a new date. While auction postponements and cancellations are announced at the location of the originally scheduled auction, you can still contact a trustee to find out before the announcement. Auctions generally occur in the same county in which the property is located. The bidding process changes from state to state, therefore you should try and become acquainted with the procedure in your state before you head to auction. There are some states that actually require bidders to bring the full amount they plan to bid in the form of a cashier's check or cash to the auction. Some states want bidders to bring a percentage of the final amount and then pay the rest a certain time after making the highest bid. If you want to find out more, the easiest way is to read foreclosure laws, or call a local attorney or real estate agent. You could also just observe an auction in your area. 3. Check for bargains Do your research. Learn as much as you can about the market value, find out if there is money owed on it and always check for liens against the property. This is all public information.
The opening bid at the auction is based on how much is owed to the foreclosing lender. This may also include fees because of the proceedings. If no bidder places a bid above that specified amount, the foreclosing lender will take possession of the estate. This amount is important because you can then compare it to the property's market value and decide if it is a potential bargain. If there are liens on the property that are outstanding, the highest bidder at the auction may very well be required to handle these liens. Once again, it's important to check if there are any liens on the property. Check with country records, use a real estate attorney or a title company, among other options. The priority of a lien is generally determined by the day it was placed on the estate. A first mortgage will have the first priority, and other liens are called “junior” liens. Most states take away all junior liens, but “tax” liens could still be in effect. 4. Find out bid amount Add up all of the factors to determine how much you can and should bid at the auction. Figuring out your bid amount will vary again if your state requires you to have the full amount on hand. You won't even be considered a qualified bidder if you don't meet the requirement. But, if you don't have that kind of cash on you beforehand, you have some options. If you already own a home, you may be able to take out an equity line of credit – which is a cash loan. If you aren't able to garner a cash loan, you might try to purchase a preforeclosure or property owned by a bank. Both of these cases will generally allow you to obtain a regular mortgage loan secured by the property being bought. Also, by coming in with a game plan and an absolute maximum to bid on, you'll be able to stave off “The Fever” as mentioned above. It's also important to remember that if you're not able to pay the rest of the amount after placing the final bid, the deposit is nonrefundable more often than not. A good deal is usually around 20% below full market value, but better deals happen all of the time. Other things to think about are the real estate appreciation in the area and how much you could raise value by making repairs and improvements. 5. Bid at the auction Contact the trustee before or the day of the auction. See if the auction has been postponed or canceled all together. Find out if the auction has been rescheduled.
If the auction is on, arrive at the location early and find the auctioneer as quickly as you can. Bidding can be intimidating, particularly if you're a newbie. Take what cues you can from other participants, but be sure to not let anyone influence you into bidding higher than you want or discussed earlier. 6. Ownership You're the winning bidder! It's imperative to get the necessary documents form the auctioneer to confirm everything. Find out the exact details of what else needs to happen before taking full ownership of the property with a real estate attorney and the auctioneer. Sometimes the property can be yours immediately, sometimes it takes a few days. In other states, you could end up waiting around a month. A few states have a “redemption period� for the new owner. During this time, the owner can actually buy the property back from you if they are able to pay the full amount paid at the auction, plus any fees. It makes since not to spend money on repairs during this period. If the trustee can't evict the current owners, the responsibility may fall on your shoulders. While rare, if necessary, contact the county sheriff and educate yourself on the correct way to get it done.
Pros and Cons of Buying a Foreclosure There are some disadvantages and advantages of buying a foreclosed home. There is always potential for a real bargain, but of course, there are potential pitfalls. Motivated Seller / Missed Payments
- Pros •
The seller is required by law to show the complete history of the property's problems, repairs and condition
•
The seller may do more repairs
•
The seller could potentially be motivated to achieve a fast sale, which makes for more opportunity for a below market purchase price
•
The seller might be more likely to provide big closing cost credits and a variety of other concessions
•
The buyer can get desired inspections
•
The buyer can still use normal mortgage financing
- Cons •
The sellers have to move out...
•
There's a possibility that the seller may not negotiate a price below the outstanding balance of the mortgage or mortgages
(NOD) Pre-Foreclosure/Notice of Default / Lis Pendens
- Pros •
The seller will definitely be motivated for a faster sale. This will undoubtedly increase the buyer's bargaining power
•
The buyer is allowed to do all of the standard inspections
- Cons •
The sellers have to move out
•
A short sale could take 45-90 days to close
•
The lender might not approve final price
•
The lender's approval of price is required unless the purchase price will pay off the mortgages and accompanying costs
Foreclosure Auction
- Pros •
The property will sell for the outstanding mortgage amount owed to the mortgage holder, this could mean a low price for the property
•
Cash payment always minimizes competition
- Cons •
No commissions or attorney's fees are pad. The buyer has to pay for his own representation
•
The purchase price at auction has to be paid in cash on the same day as the auction takes place
•
No inspections allowed
•
Buyer could buy property and owe mortgage payments, liens and other taxes
•
The bank can't disclose issues with condition or history of the property
•
Property condition has been damaged in the past due to upset owners
Post-Foreclosure Bank-Owned Property REO – Real Estate Owned by Lender
- Pros •
The REO sales close within the standard escrow time frame
•
The bank is motivated to get the property sold and negotiate price and other costs
•
The house will be empty
•
The title is good to go. The buyer won't be responsible for back taxes, liens or mortgage
•
The bank will pay the real estate agent's fee
•
Inspections and mortgage financing allowed
- Cons •
The bank can't disclose condition issues or history of the property
•
The bank will need more paperwork
•
The bank will not help with additional repairs
Tips for Winning, Mistakes for Losing Purchasing a new home or property can be a great experience for you and/or your family. It's an exciting process, but it's important to know some costly mistakes others have made when heading into a real estate auction. Here are the most common: 1. Neglecting research. Research is imperative. It's the only way you'll be able to figure out the market property. This will help you greatly during the negotiation process. Select around three suburbs and visit as many properties as you can manage in a six to twelve week time frame as prices can fluctuate. It's a good idea to shoot for around a hundred different properties within that time frame. 2. Thinking selling agents are there to help you. Selling agents don't have you in their best interest. They work for the seller, not the many bidders wandering around. Selling agents tell you what you want to hear and could leave out issues. They're trained to influence you. Use them for basic details. Rely on your own research for more specific questions. Here's a list of a few good questions: • • • •
It's been on the market for how long? How did you decide on the price? What are the offers thus far? Any sales recently on the street the home is located on or the surrounding neighborhood that are comparable in price? Show me.
These questions will help you gather the kind of information you need when trying to establish property value. 3. Beginning your search without proper financial approval. A common mistake is searching for a home without finance approval. You don't want to watch the home you want slip by while someone else is exchanging contracts, particularly while you're trying to schedule an interview with your local bank or a mortgage broker. It can be a draining experience for you. Be sure to find out how much you can borrow before you begin your search. 4. Going beyond your means. Unfortunately, we're all aware of the recent grief countries went through in the wake of the great recession. Don't make the same mistakes of the past by
spending beyond your means. Make certain your repayments aren't higher than 25% of the total household income. Don't borrow over 80% of the property's value. This helps you avoid paying mortgage insurance and gives you equity in the property if there is a problem with the market. Nowadays, you can obtain loans for up to 100% of the overall purchase price. This isn't the kind of pressure you want to put on you or your family. A good rule of thumb to go by, is if you can't make a 20% deposit, then you probably can't afford the estate. Don't forget that it'll be much easier to sleep at night in a smaller home, than worrying about the bank selling the home right from under you. 5. Not doing inspections. Only around 30-40% of people get all of the appropriate inspections done. Wiring problems, sub-par renovations, termites, etc... There could be a lot wrong with a home. So, you might as well get the necessary inspections done. 6. Forgetting to factor in ongoing costs. The final price you pay for your home/investment property is only the first of several ownership expenses. Research the accompanying costs and make sure you can afford it all! 7. Getting influenced by rental guarantees. A good property often doesn't need a rental guarantee. Many times, properties marketed with rental guarantees won't reach the rental figure that is being guaranteed. Also, the inflated figure pushes the ROI up against the yield and let's the seller put a higher price on the property and still maintain a yield of, say, 5%. This kind of guarantee is a different form of insurance and you always pay the premium. 8. Buying property without seeing it. Purchasing property without actually seeing it inperson can be a recipe for disaster. Photos, virtual reality tours and descriptions can only go so far and all can be manipulated. There's no reason to not inspect the home yourself for safety. 9. Limiting your options. People who flat-out don't want to go through the auction experience are really reducing the number of homes and removing some potentially good deals because of their discomfort. If you can't trust yourself to stay reasonable during the auction, you can always hire an expert or bring a friend to bid for you. 10. Listening to too many opinions. You'll find that a lot of people consider themselves experts when it comes to real-estate. Co-workers, friends and family – they will all offer you their two cents. But, the only way you'll know if you're going after a good property is if you've put in the research.
Tips to Make a Winning Bid • • • • • •
Bid with confidence Ask the auctioneer solid questions Be sure to be in the auctioneer's line of sight Don't get caught up in the auction hype Have a clear bidding limit. Set the limit and stick to it Walk away if the bidding exceeds your maximum
If a property doesn't reach the reserve, don't walk away like the other bidders. It's okay to find the vendor afterward and see if he's open to negotiating with you. Bidding on real estate can be fun and even profitable. It can also be a poor experience for the uninitiated. There are too many resources out there (including this one) for you not to take advantage of them all. Do your research and make sure you're making great decisions!
Resource Links •
http://www.bno.com/pages/about-real-estate (Bid on or sell at BNO's live auctions, streamed online in real time. Art & Collectibles, Vehicles, Real Estate, Charity. Exciting, safe, low fees, great services)
• www.realtytrac.com (Search for foreclosed homes, house auctions and REO properties. Nearly 1 million homes in database.) • www.realitybid.com (Online home auctions including new and foreclosed homes a well as commercial properties.) • www.homesearch.com (Hundreds of real estate auction and foreclosure listings.)