Going, Going, Gone!
Buying houses at auction is the hot new real estate trend
Most people buy a few souvenirs when they spend a day at the New Jersey shore; Robert Cariola picked up a house. Cariola and his wife were taking a Sunday drive in August 2001 when they saw a sign in front of a two-story Colonial cottage, blocks from the ocean in Wildwood, announcing that the house would be auctioned that afternoon. Out of curiosity, they went inside and found an elegant, century-old fisherman's boardinghouse that had fallen into disrepair. On a lark, Cariola stuck around for the bidding — and the gavel came down on his $48,000 offer.
"Including the purchase price, I've put about $110,000 into the house. Since I bought it, it's become a mad market down there, so I'm more than in the money on the place," says Cariola, a Philadelphia traffic cop. But he never would have purchased it if not for the auction. "Buying a house was the last thing on my mind that day. It was the bidding that made it exciting."
While nobody recommends buying a house as an impulse purchase, it is precisely that exhilaration — driven by the allure of competition and the tantalizing prospect of picking up a bargain — that has made residential auctions a hot ticket in real estate. Buyers spent $55 billion at commercial and residential real estate auctions in the U.S. in 2001, according to the National Association of Realtors. That represents nearly 7 percent of the value of all real estate transactions.
Every type of property, from new construction to historic homes to handyman specials, is available on the auction block. The key advantages for buyers: As long as the house isn't in foreclosure, auction purchases tend to be clean and quick, closing in about half the time of a typical real estate sale; everybody interested in the house has an equal chance to get it; and if bidders don't get carried away, the auction process can provide some reassurance that they're not overpaying for the property.
"Auctions are transparent," says Dorothy Nicklus, who has conducted hundreds of them as owner of 24/7 Auctioneer (www.
247auctioneer.com), in Guttenberg, New Jersey. "When there are twenty people openly bidding, buyers can see what value others are putting on the property, something that they can never be certain of when they blindly put in an offer without an auction."
That doesn't mean, however, that you should expect to get a house on the cheap. The high bid on most auctions is between 90 and 110 percent of what the property would fetch if traditional selling methods were used, according to industry estimates.
Types of Auctions
The best deals can be had at absolute auctions, which are also the most common. At these, the bidding starts at $1 and increases until no one tops the best offer, which the seller is obliged to accept. Under the right circumstances — say, a slew of other desirable properties come on the market that week, or bad weather keeps bidders away — it's possible to walk away with a bargain.
Other types of auctions offer sellers more protection. Minimum-bid auctions set a starting point for bidding that is usually close to the price the homeowner wants for the property. Reservation auctions give the seller the right to accept or reject the high bid for up to 72 hours. And in dual-bid auctions, sealed offers are solicited first and the highest bid is set as the minimum in an open auction. Most auctioneers discourage any of these approaches, however, because buyers tend to shy away from them. Only absolute auctions generate enough interest and the potential for the type of bidding fervor that will get top dollar for the home.
While rules vary from state to state, before an auction can be held, a title and lien search as well as all inspections usually must be completed. Typically the auctioneer manages these details and includes the results in a "bid package," available at an open house or from the auction company directly. Since the buyer knows beforehand if there are any complications or extra costs surrounding the purchase, few auction sales fall through or face unexpected obstacles. The event is announced via local newspaper and radio ads and auctioneer Web sites. The National Association of Realtors (www.realtor.org) also maintains a list of auction resources.
To participate in most auctions, buyers must preregister with the auctioneer, who determines if they qualify for a mortgage, and also submit a deposit of a few thousand dollars, in cash or a certified check, as "earnest money," which is refunded if they don't get the house. The winning bidder has five to 10 days to bring the deposit up to the standard 20 percent, and must close the purchase within the period specified in the bid package, typically around 30 days.
Auctions are relatively risk-free for buyers, experts say, if you follow two critical pieces of advice. First, examine the property sufficiently in the weeks leading up to the event — usually there are at least a few open houses — to be certain you want to live there. Second, don't get so caught up in the excitement of the auction that you exceed your predetermined walk-away price, the highest amount that you're willing to pay. That amount, based on home sales trends in the neighborhood and your own budgetary considerations, must also take into account the buyer's premium, often about 10 percent, which is tacked on to the high bid to cover the cost of the auctioneer's services.
"A home should not be a spontaneous, emotional buy, ever," says Barry Baker, a veteran auctioneer and the owner of Greene County Realty, in Xenia, Ohio. "So even if you're participating in an auction, very practical concerns — do we want to spend twenty years here, do we like the neighborhood, can we afford it? — have to rule the decision, not the desire to top the guy next to you."
Buying Foreclosed Property
Much of the "you can make out like a bandit" misconception attached to residential auctions stems from the hype surrounding foreclosures, which are homes that have been repossessed by banks for nonpayment of mortgages, or by municipalities for tax default. There are dozens of Internet sites that promise foreclosed homes for a few thousand dollars at auction. Such deals, however, are far more complicated than advertised, and real estate professionals warn that individual buyers should steer clear of foreclosure auctions or risk losing a lot of money.
Unlike residential auctions, foreclosures are truly "as is." There's no title or lien search, and in many cases people still live in the homes, making it impossible for prospective buyers to see the inside. What's more, the winning bidder usually has to pay in full for the house within hours of the auction. That money is routinely tied up for six months or more until the closing, while the new owner extricates the property from outstanding loans and judgments and may even have to evict the residents — all of which can add considerably to the cost of the house. And because the amount owed on such properties tends to be high relative to their appraised value, most foreclosures sell for only about a 30 percent market discount. Typically, the bank or municipality sets the opening bid, which equals the mortgage balance, late fees, legal fees, and taxes.
Because of the risks, most foreclosure auction attendees are professional real estate speculators, who investigate liens, title, and tenant issues and balance what they learn against the amount due on the house before deciding whether to make a bid. "The foreclosure success stories you hear are about gamblers who have done a lot of homework and still know that they're going to lose a few — and sometimes lose big — in hopes of winning a few," says Mike Steiner, president of Absoluteforeclosures.com, in Davidsonville, Maryland. "Someone looking for a bargain-basement deal on a place to live is just not going to come out on top among these well-prepared sharks."
Auctions on the Web
Right now, the Internet is the leading source of information about residential auctions, but in the next couple of years it is likely to become a hub of auction activity. There are already hints of what's to come. At Ibidco.com, national developers like Beazer, Ryland, and Taylor Woodrow routinely auction new homes to cyberbidders who have been prequalified and assigned a code number that lets them participate in the online event. Rbuy.com is in the process of setting up a Web site where real estate agents can auction their listings of existing properties. Since all contingencies except the final price are worked out before the bidding begins, Rbuy's goal is to eventually let agents conduct a paperless transaction — communicating with buyers, sellers, bankers, and lawyers via the Internet — and complete it in as few as five days.
But any online ventures will have to contend with Ebay, the Web's biggest auctioneer, which has also begun to offer houses. To avoid having to preapprove buyers and navigate local real estate laws, Ebay's current auctions are little more than listings that bring together buyers and sellers, without the option of bidding. But Ebay officials have announced plans to expand the site's real estate auctions through partnerships with national agencies.
Of course, Web auctions lack a critical part of the home-buying experience: a chance to see a house up close before bidding. Virtual tours and still photos are no substitute. Which is why most auction experts say that online activities will never replace live events. "It gives me a chill to look out at a group of nervous bidders and know that one of them is going to own this house in just a matter of minutes," says auctioneer Nicklus. "Talk about immediate gratification."
Selling Your House at Auction
In a seller's market, an auction can be an ideal way to get top dollar for your house and avoid the agonizing question of whether the first good offer you receive is the best offer you're going to get. With a surplus of buyers chasing too few homes, almost every property can draw a crowd at auction. And the more bidders, the more likely the final price will surpass the amount you would get in a traditional sale. What's more, an auction is a closed-end process, virtually guaranteeing that your house will be sold by a specific date.
The first step is to find a local auctioneer. There are member listings on the Web sites of the National Association of Realtors (www.realtor.org) and the National Auctioneers Association (www.auctioneers.org). Look for certification from the Certified Auctioneers Institute or the designation Accredited Auctioneer of Real Estate. Generally, auctioneers charge an up-front engagement fee — anywhere from $500 to a few thousand dollars — to cover the initial costs of prequalifying prospective buyers for a mortgage, title and lien searches, inspections, advertising, and open houses. (The bulk of the auctioneer's fee comes from the buyer's premium, typically 10 percent of his final bid.) Even with a high-end auctioneer and an expensive property, the cost to sellers is much less than a standard 6 percent real-estate commission.
Most auctions take about 30 days to organize. If few buyers preregister during this period, a seller might do better with a traditional broker, or risk getting less than top dollar for the home. In general, closings take place in as few as three to four weeks, as stipulated in the bid package, because with much of the due diligence already completed, the only thing left for the buyer to do is finalize mortgage details.