Monday, December 15, 2008

Real Estate Auctions

Buyer Beware!

I've heard a lot of stories from the 'old days' and read between the lines with the plethora of disclosures these days. I suspect that the current rules and regulations for the real estate auctions resemble what real estate was like when it was less protective of Buyers and more in favor of Sellers.

Why are people buying through auctions then? Well simply, it is the possibility of a good deal. IF you know what you are doing and IF you are in the right place at the right time, THEN maybe you are getting a good deal.

I have some clients that wanted to explore buying a particular property through an auction. It was a property they were interested in when it was listed on the market. We registered with the auction and began reading their paperwork and found out some interesting facts:

1) You can't thoroughly inspect a property. You can walk through with a contractor but you can't order the usual inspections once you are in contract the way you typically would.

2) No disclosures! Of course they don't really know the properties so they can't really disclose but they also don't preorder inspections or provide the typical 'JCP Report' which gives information about the natural hazards and environmental issues for that area.

3) You can't pick the title company. That isn't that unusual because the Seller (the Auction House) was paying for the title insurance but that's all they were paying for. Santa Clara County is a Seller Pay County and typically the Seller pays most of the transfer fees (Title, Escrow, County Transfer Tax, Association Documents & Transfer Fees, Home Warranty). Yes, all that is negotiable typically but not with an Auction. They pay the Title Fee and that's it folks. They do prorations for taxes but have a disclaimer in case they are in error that puts the responsibility back on the Buyer.

4) This one actually made my lender snort when she read about it in the contract - read on! You can use a different lender than the ones the auction house provides at the auction BUT you need to have an 'unconditional approval letter' from the lender. There is no way a lending institution is going to provide a letter without having an appraisal or looking at a prelim at the very least. Basically, you have to use their lenders unless you can buy a property with cash AND THEN you still have to go through their lender's approval process just for the hay of it.

5) There were more disclaimers as we read through the terms & conditions and the contract. It is important to know that although you might be bidding a certain price, once that price is accepted, the Auction House adds 5% on to that bid for the "Purchase Price". They did repeat that fact many times throughout their literature in all fairness to them but it was that kind of circuitous thinking that was important to follow.

6) My favorite - Apparently some of the homes aren't vacant and you might end up having to evict the tenants once you actually own the property. The Auction House does not guarantee they can get the tenants out.

By the way, the home we were looking at sold at market value (my clients did not end up buying the property). It actually sold for the same amount of money that a home down the street sold for recently. The Buyers could have bought it on the market and had their representation which they gave up by buying at auction. It was interesting to me that the home found the market value even at auction.

My 2 Cents - This is way too risky for the average person. Maybe a contractor or even someone who has carefully done their homework but the risks are great. Any of the homes in the really popular areas (Aptos, Los Gatos, etc) that sold ended up being bid close to market value. The good buys were ones that weren't as desirable.

1 comment:

Gretchen said...

Thank you for sharing that experience with us, Harriet. And I'm sure your clients appreciate your reading through all of the paperwork for them and explaining how an auction compares to a standard purchase. I think your 2nd to last paragraph tells it all: in most cases the buyers end up paying what they would pay in a non-auction purchase, but they lose many of their rights to obtain disclosures, inspections and financing. Very interesting.

- Gretchen Merrick