by Mikey and Steven Hall 

Those owners who fail to cure their mortgage default, can't make other arrangements (e.g. a deed in lieu of foreclosure), or for one reason or another are unable to sell their property inevitably end up in foreclosure at a Trustee sale.

Because buyer's at a Trustee sale are required to pay the entire purchase price in cash only a small number of homes are actually selling; the majority are transferred to the ownership of the lender. These bank owned properties are called "Real Estate Owned" or "REO" properties, and from the lender's point of view they are non-performing assets.

Since lenders are generally not in the business of owning and managing real estate, it should come as no surprise that they are always looking for ways to sell their portfolio of non-performing assets. One interesting approach involves the use of independent property auctioneers who, for a fee, will organize, advertise, and host real estate auctions.

In an effort to avoid the all-cash requirement that handicaps Trustee sales, these auctioneers will often make arrangements with lenders to provide lending for buyers with the winning bids.

An auction might have the following requirements:

1. The buyer must pre-qualify with the auctioneer's lender.

2. The buyer must be prepared to put down a minimum of 5% of the purchase price while the remainder may be financed.

3. The auctioneer will add a specified percent to the purchase price, this can be as much as 5%, as compensation for its work.

4. All financing must be arranged before the auction, or the buyer must plan on using the auctioneer's lender. Otherwise the winning bid must pay cash.

5. The buyer is usually required to show a cashier's check for some specified amount before being allowed to place a bid on a property.

6. The bidding on any given property will open at some amount which is specified by the auctioneer.

Many times, the opening bid is set at some absurdly low amount. For example, a home once listed by a broker at $950,000 might have an advertised opening bid at less than half that amount. The idea behind the low opening bid is to generate excitement about the property.

Sounds great! Where's the hook? It's simple, the seller of the property may not be required to sell at the winning bid! Each property can have a "reserve price" that isn't disclosed to the bidders. If the bidding doesn't go higher than the reserve price, the property just isn't sold.

In other words, you can find yourself in a position where you have visited a large number of homes and selected one or two you like, pre-qualified yourself on these properties, picked up a cashier's check, gone to the auction and managed to make the highest bid only to be told, "sorry" your price isn't above the reserve.

While the actual amount of the reserve on a property might be secret, you can and should ask at the very beginning if the auction is being held with or without reserve.

Another point to remember is that REO properties are sold on an "AS IS" basis, meaning the banks are not going to repair anything. More importantly, as owners who have never been in possession the lender is exempt from the Transfer Disclosure Requirements, in California, and do not have to make any disclosures regarding the property's condition. To make matters more risky, most auctions are final and once you purchase the house you can't change your mind.

The all-sales-are-final condition can be quite important. The approved California Association of Realtors (CAR) sales contract used by Realtors® grants 17 days to the buyer within which to either waive all contingencies or walk away from the deal. It's worth your while to get a copy of the purchase agreement used by the auctioneer and/or seller before bidding on a piece of property. It's also important to do your inspections before the bidding starts. (Costs of deferred maintenance should be carefully considered.)

As a last point, remember if you use the auction approach to purchasing property you will not be represented by a Realtor® who understands the purchase process. You must make it your business to completely understand the process and to protect yourself. Good luck.

mailto:AskMikeyHall@gmail.com

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