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 That reserve price may or may not be published.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.

You’ve heard the old adage: Buy low and sell high. This is the intention of everyone who buys any investment. But, unfortunately, for most of us, we too often miss the opportunity and end up buying high and then selling low.

Why is that? Because very often we are driven by either greed or fear or both. When a market is increasing, we are afraid that we will miss the opportunity and so we buy before the market gets so high that we can no longer afford to buy. When a market is decreasing, we sell because we want to lock in whatever we may have before we lose it all. Sometimes we are looking so hard for the easy money that we neglect to adequately look at the opportunity costs of our decisions.

Real estate is, and always has been, a long term investment. Although in the recent past, one could purchase a home and sell it a few years later and make a sizeable profit, real estate investments typically require several years of maturity in order to produce acceptable yields. Today, real estate still offers a variety of tax incentives not available with other investments, and has the added benefit of being the cornerstone of one’s financial well-being. After all, you are still purchasing a house for someone—will it be for yourself or your landlord?

Several years ago, when the real estate market was increasing, people would often ask if it was the best time to buy. Inventory was low, mortgage rates were low, loans were relatively easy to get and homes were commanding the highest prices in history. Renters were taking advantage of the opportunity of owning their own homes. The media reported increasing prices and people expected to make large returns on their investments.

Today, inventory is high. Many investors have decided to sell. Many bank-owned homes are on the market. Mortgage rates are low. Home prices have dropped. People with good FICO scores can get favorable loans. The media continues to report declining sales and lower prices, causing the concern that if one doesn’t get out now, one will lose any gain realized over the past few years. Very few people are asking if this is the best time to buy.

Avoiding the herd mentality and doing the opposite of what everyone else is doing allows the astute investor to take advantage of opportunities the crowd doesn’t see. It takes guts to do that which others will not do. Homes are on “special”. Some rental properties have positive cash flow for the first time in several years. High inventory allows for greater choices. Whether you have thought about purchasing your first home or a second home, talk with your professional REALTORâ. He or she can help you determine how much house you can afford, whether home ownership fits your investment goals, and can guide you toward successful home ownership.