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 That reserve price may or may not be published.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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This week we continue with our series of the list of questions you should ask prior to hiring a real estate professional to help sell your home. Last week we asked, “Tell me about your experience and philosophy of doing business.”, “What resources does your company provide to help get my home sold and closed?”and “What is your marketing strategy?” The following questions will help you round out the interview process to better understand the agent you decide to hire.

1. What is your negotiation strategy when an offer on my home is received? You need to know what the agent plans to do with an offer. How does he plan to present it to you? What questions have been asked of the other agents and lenders? What is the selling agent’s experience in negotiation? When an agent cannot tell you how he negotiates, he may be willing to leave money and/or terms on the table that could have been more favorable to you.
2. How will you communicate with me during the listing period? Knowing what to expect regarding communication can greatly reduce anxiety levels. Would you prefer a telephone call or is an email more convenient? How often would you like to hear from the agent? Letting the agent know what type of communication and how often you would like to be communicated with sets parameters and will help you better understand how flexible the agent may be in meeting your needs.
3. Are you a member of NAR, CAR and a local association of REALTORS©? Not every licensed salesperson is a member of NAR, CAR and a local Association of REALTORS©. Not every salesperson can call herself a “REALTOR©” This is important to you because every REALTOR© is committed to following a strict code of ethics. In this most important transaction, you need to know that you will be treated honestly and fairly. Additionally, as a member of NAR, you can be confident that your agent has the latest training courses, articles regarding the latest legal decisions and resources at hand to help market your home more effectively.
4. How are you proactive in protecting my interests? Most real estate agents are independent contractors. As such, they run their own small businesses. How many transactions are they juggling at the same time? Does the agent have time for your listing? What forms, disclosures and procedures does your agent employ to protect your interests? Does the agent carry Errors &Omissions insurance? Does the agent make a habit of representing both buyer and seller? If so, what protections and procedures are in place to be sure your interests are met fairly?

Real estate is bought and sold every day. In a changing market it is important that you do your homework before hiring someone to help sell your home. By asking these questions, you will improve your chances of finding and working with a qualified individual. This will help make one of life’s most stressful transactions smoother, so you can enjoy it along the way.

-Kathy Fox

(reprinted from The Sacramento Union with permission)