As the inventory of unsold homes in the Sacramento area continues to increase, some sellers have sold their homes through an auction process. This is particularly true with respect to homes that have been taken back by a bank through foreclosure. Sometimes  called a “Lender Foreclosure Auction”, these auctions are typically heavily advertised to the public with the aim of drawing large crowds of people hoping to walk away having purchased a home at a perceived rock bottom price. A quick search on the Internet yielded hundreds of sites for real estate auctions in Sacramento!

Whether you are considering buying a home to live in or are working toward an investment property, there are several things you should think about before wandering into a real estate auction and bidding on any particular property. While purchasing a home from an auction house might be a good result for some buyers, the unfamiliarity of the process can be frustrating and can result in certain problems.  With respect to auctions, the old adage of “Let the Buyer Beware” may well be true.

Before even considering going to an auction, all bidders need to understand the rules of that auction.  Most auction houses will send you a brochure upon your e-mail or phone request. There are as many different rules as there are auction houses. Thus it is essential to read that particular auction company’s rules very carefully. If you don’t understand something, don’t hesitate to ask questions of the auction company. Most reputable auction houses are willing to help you understand their process.

In many auctions, you will be required to have a cashier’s check in an amount specified by the auction company as well as a picture ID in order to register to be a bidder. Sometimes registration has to be completed prior to auction day and other times registration takes place at the auction. Be sure you have read the rules and comply with the requirements in order to qualify as a bidder.

Most auction companies sell homes subject to a “reserve price”. This means that the owner has established a minimum selling price and the sale is subject to the owner’s later confirmation of the final bid price. That reserve price may or may not be published. Realize that the owner is hoping that bidders will be caught up in the excitement of an auction ferver so that bidders are tempted to bid higher and higher. It can sometimes take several weeks to get the owner’s final approval of the bid price.  In the event the owner does not approve the final bid price, the house goes back onto the market.

Homes sold through the auction process may also require a “Buyer’s Premium”.  This means that there is a percentage that is automatically added on top of the final bid price (usually between 3% to 10%), which the successful bidder will need to pay to acquire the property.  Therefore, the actual price paid for a home will be the winning bid price plus the Buyer’s Premium.  If the Buyer’s Premium is 5% and the winning bid is $300,000 then the price actually paid for the home is $315,000.

Once a bid has been formally accepted in writing, expect to move quickly to closing. Although the Purchase Contract may allow you to have a period of time to qualify for a loan, you will be well served to have talked with a lender prior to going to the auction. Knowing what you can qualify for and how you want to structure your loan is important no matter how you purchase a home. Typically the auction house sets a deadline for closing (an example would be 30 days after the auction) and you may lose your earnest money deposit if you are unable to close by the set closing date. The amount required for an initial deposit and the form of the earnest money deposit may vary from auction house to auction house, so be sure you understand that requirement before bidding.

Most homes sold at auction are sold “As Is, Where Is”. Briefly, this means that the home is sold in its present condition, without any warranties or guarantees and with the understanding that the seller will not make any repairs. If the home is being sold by a lender after the foreclosure process (these properties are referred to as “REOs” or “Real Estate Owned)”, understanding what liens and encumbrances run with the property is extremely important. Buyers should carefully check with a title company regarding the status of title to determine what encumbrances exist that might impact the future use and enjoyment of the property.

Be sure you have done your homework before going to the auction. It is important that you have completed, prior to going to the auction, any inspections and/or investigations that you may need to undertake to determine the value and condition of the property. In determining a bid price, you should take into consideration any negative factors found during your inspections and/or investigations. Have your licensed contractor preview the home with you so you can make an educated assessment of the cost of required repairs before you ever step into the auction house. Determine a “top” price that you are willing to pay and stick to it. Once the hammer drops and the auctioneer says, “Sold” you may lose the earnest money deposit should you later determine that the house was not what you expected.

While it is possible to purchase a home at a discount price from an auction house, it is not easy and a mistake in any area could prove to be very costly. Many people do not understand that local Realtors list most homes taken back by a bank in foreclosure in the local Multiple Listing Service system and that many properties sold through auctions are also listed for sale with Realtors. If you are truly interested in purchasing a property that has been foreclosed upon, you may be better served by contacting your local real estate professional and allowing him/her to guide you toward successfully purchasing a property whether it or not it is being auctioned.

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