Prudential NorCal Realty’s Fox Team

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 That reserve price may or may not be published.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.

Gary Watts, a renowed real estate industry economist, recently spoke about the real state of the real estate market, especially as it relates to the Sacramento region. I thought I would share with you the good news he has for people considering real estate investments. For more information about Mr. Watts, visit his website at www.impactre.com.

Real estate markets are always cyclical, and effective real estate investments are held for the long term. Regardless of what the media headlines scream about the terrible shape of the housing market, the astute investor will look beyond the headlines and discover that today’s market offers opportunities that may not be available again in the near future.

Hardly a day goes by that headlines don’t trumpet the implosion of the subprime lending market, the lackluster sales of homes in the area or the radical increase of foreclosures. Newspapers sell more papers with negative headlines. While the headlines may be factual, lets explore why they are usually not accurate. A little historical perspective is in order.

In 1969, Business Week said in an article about the housing market, “The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000.” And, in 1977, National Business stated, “The median price of a home today is approaching $50,000…housing experts predict price rises in the future won’t be that great.” A decade later, by 1980, home prices in California had risen an average of 11.5% per year. While the headlines may have been factual, history shows they were not accurate.

In the early 1980s, inflation was running about 21.5% and 30 year fixed rate home loans ranged from 16% to 18%. In 1985, Money Magazine wrote, “The golden-age of risk free run-ups in home prices is gone.”At the end of the decade, California home prices had risen by an average of 7.95% annually. While the headlines may have been factual, history shows they were not accurate.

From 1990 to 1996 California home prices declined less than 2% annually, for a total of 12%. The San Francisco Examiner in 1996 wrote, “A home is where the bad investment is.” While the headlines may have been factual, history shows they were not accurate. From 1998-1999, Sacramento area home prices increased 38%! According to the California Association of REALTORSâ, the average annual rate of appreciation for California homes since 1968 is 7.75%.

While today’s headlines may be factual, they are not accurate. California is poised to realize a huge jump in real estate values over the next several years, just as they have done in the past, for several reasons:

The population of California is expected to double by the year 2050—from 36.5 million residents today to a population of 60 million. Many of those people will settle in the Sacramento region.
California’s economy is large and diversified. We are home to many of the most creative and innovative companies in the world—think Google, Apple, HP and many, many more. California is home to 1 out of every 11 workers and produces 15% of the Gross Domestic Product in the United States.
Northern California is home to over 30% of California’s entire diversified workforce: trade, a growing service sector, expanding electronics, manufacturing, high-tech, bio-tech, construction, tourism, agriculture and government, are among the many industries employing our workforce.

As more and more people call California home, the housing industry will not able to keep up with the need for new housing units. With a mild climate, lots of recreational opportunities, relatively low housing prices and a highly educated workforce, the Sacramento region will continue to be a magnet for highly productive jobs. Sacramento is forecasted to be in the top 15 markets for both population and growth over the next five years.

Currently, home prices have dropped a bit, interest rates are at historical lows, and the large number of homes on the market allows for more choice than any time in the recent past. Now is the time to consider purchasing real estate. Whether your first home, a second home or part of a long term investment strategy, Sacramento area real estate will be a strong cornerstone for your financial future. Don’t look back in several years and say, “I wish I had taken advantage of the opportunity.”

-Kathy Fox

(reprinted from The Sacramento Union with permission)

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