Phoenix Real Estate Auctions Explained: Part II

Bank Owned or Foreclosed Home Auction

This is the most visible auction type as tremendous amounts of money is being spent on marketing this type of auction here within the Phoenix real estate market.  Particulary, US Home Auction or REDC and Zetabid are companies facilitating these auctions.  What is different is that the companies are contracting out with the lenders and banks that have a significant number of property assets that they have acquired through foreclosure and want to liquidate as quickly as possible.

 Here is a run-down of the process:

• Step 1 - Typically, there will be a series of open houses to allow potential bidders to view the properties in person.  Language in the agreements indicates that buyers at the auction will not have recourse to conduct home inspections and other due diligence on the properties once they have agreed to purchase them so the open houses are the opportunity buyers have to inspect homes. 

This is very important to understand.  Most buyers who look at the open houses will not be bringing a home inspector with them to survey each property they look at.  For many buyers, this would be impractical and expensive unless there was one specific property to look at or the home inspector was doing the work pro-bono.  As such, if you are considering bidding on a property and did not conduct thorough inspections, you need to understand that the price you pay should incorporate some level of risk pricing - in other words, be willing to pay a little less (reduce your offer price further by a range of  percent based on the overall value you assign to the home - example, a less expensive home that has a defective air conditioning unit would be higher in the percent estimate given the cost of an air conditioning unit) for the home based on what you don’t know that might be wrong with the property and cost you money to repair. 

Keep in mind that the older a home and the worser condition it is, the many more potential issues that may exist with the property.  When in doubt, make every effort to thoroughly inspect the home, be willing to pay much less for it, or don’t bid on the property at all.  Also, if you plan on doing major renovations or remodeling, try to bring a knowledgeable contractor who can help you to understand the associated costs to doing so.

• Step 2 - Peform an analysis on the value of the property through use of comparables in the area.  As I recommend having a Realtor help you with finding a home, your Realtor can help you here.  If you don’t have one currently, feel free to contact me to help. 
  • Try to categorize the estimated value of the property by what constitutes a bad price, a good price, and a great price to pay for the home and use this to determine what you are willing to actually pay. 
• Step 3 - Estimate what you are willing to pay for the property as mentioned above.  Make sure to add in the auction house commissions and fees into the calculation.  Don’t forget that the home valuation should also take into consideration the cost of repairs and any remodeling that would need to occur as well as any additional costs based on your overall objective with the property (personal residence vs. investment property). 
  • Here’s an example:
    • The CMA puts the value of the property in the range of $180,000 to $200,000.  You know that the property is in bad shape already and so you figure that this particular home would fall to the bottom of that level or around $180,000 to $185,000. 
    • You figure that to make the home what you want it to be, it will cost $15,000 to repair and remodel which would put its value now at the top of the range (price of home + renovation costs).
    • There is a $5,000 transaction fee (this may be a percentage of the bid price instead)  or purchasing the property at auction. 
    • You weren’t able to complete a full home inspection but are satisfied by what you see so you figure that there is only a risk of no more than $3,000 in costs that you can’t see that may or may not be there.  Buyer beware here though.
    • Uncalculable - There is an expectation that buyers should get deals when buying a home through an auction.  This is the intangible added ‘value’ that a buyer might expect to get by going through this process.  As such, if you ask yourself, “Will I feel really good about paying  this amount for this home through the auction?”  If the answer is not clear, don’t buy the property.     
    • You devise the following:
      • So-so price = $175,000 to $180,000
      • Good price = $165,000 to $170,000
      • Great price = $160,000 to $165,000
      • Really great price = <$160,000
    • You decide that based on your particular objectives, you will be happy paying a bid price of $162,000 to $168,000 to purchase the property. 

Note: This is a simplified overview.  Your analysis should be detailed in terms of potential costs of the property, etc. and again, reflect your particular objectives.  If you were looking for the property as an investment, you may want to add in information as to what rents can be achieved and how the mortgage (if financed) payment would compare as well as other tax-related and equity advantages from buying the property. 

• Step 4 - Read through thoroughly all the terms and conditions related to the auction process and do not wait until the day of the auction to do so.  Some buyers may find that they don’t like the process right then and there and decide not to go.  Understanding the terms and conditions upfront will save confusion later and give you a heads-up as to what to look for during the actual auction.
• Step 5 - Sign up for the auctions.  If you are working with a Realtor, make sure to register them so that they can attend with you and get paid for their time and effort. 
• Step 6 - 1 day before - Get a cashier’s check with you to the auction.  Check for the specific amount but $5,000 is likely the amount.  Check the auction company’s website or call to find out when the home you are intersted in is going up for bid.  Plan accordingly.   
• Step 7 - Auction Day - Make sure to take your cashier’s check, your checkbook, personal identification, website signup information, any pre-approval documentation from a lender or proof-of-funds documentation if paying by cash.  US Home Auction actually recommends bringing your last 2 years of tax returns, last 2 years of W-2’s, and last 30 days of pay stubs for the lender pre-qualification.      
• Step 8 - Check in at the auction.  You will present the information above in order to be able to bid. 
• Step 9 - Watch intently the process to understand better how it will work.  If you go early, there may even be a presentation on how the bidding process works that you can attend.  Watch the auctioneer to see how bidding is proceeding and any involvement they may or a representative may have.  Note: There may be online bids that come in so watch for how these might be communicated as well. 
• Step 10 - Bid on the property you are interested in. 
• Step 11 - If you are the winning bid, then you will be asked to proceed to a separate area in order to follow-through on paperwork and contracts.  This is also when you should find out if your bid was accepted by the seller or not.  If not earlier, you will likely be prequalified at this point so be prepared to hear about financing options through the preferred lender in attendance at the event.   

 US Home Auction or REDC Auction Items to Keep in Mind

1.  There is a “reserve price” for the properties.  In other words, even though the starting bid price might be $20,000 on a $70,000 (list price) property and your $25,000 bid is the winning bid, if your bid didn’t meet the reserve price of $55,000, you likely don’t get the property unless the Seller agrees anywayt and the property may be put out for bid again.  Unfortunately, the reserve price is not disclosed to the public so there is no way of knowing what the real minimum price might be.
2. The sale is subject to approval by the seller.  If the seller is not satisfied with your winning bid, the seller can simply decline the sale.
3. US Home Auction or REDC charges a “Buyer’s Premium” of 5%.  So, if your bid is the winning bid at $200,000, you can expect to pay Zetabid an additional $10,000 which is added to the sale price.  Make sure to factor this in to your calculations. 
4. You are required to bring a $5,000 cashier’s check to the auction in order to be authorized to bid on properties. 
5. When buying a property, you will be required to provide 5% of the total sale price (your high bid price + the 5% Buyer’s Premium).  The initial $5,000 cashier’s check can be supplemented by a personal check.  All of this is due upon completion of a signed purchase agreement by both parties.  Once the deal is final, you likely don’t get this back should you somehow back out of the transaction.  However, if the property is currently occupied, the contract does allow for a 7 day inspection period within which the buyer does have an opportunity to cancel the agreement at no penalty.  Note: When buying a bank owned home through the normal resale process for homes on the open market, earnest deposit here in the Phoenix area generally runs around .0075 of the sale price of the home.  Buyers have a 10 day inspection period to conduct inspections and other due diligence and can cancel the deal at no penalty if they are  not comfortable with the results of inspections as long as they do so within that 10 day period. 
6. IMPORTANT: The Auctioneer can place bids on the behalf of the Seller.  This may be done to ensure a property does meet the reserve price.  Whether this will happen during this auction or not is difficult to know but something to be aware of when watching the proceedings.   I did not see an FAQ addressing this question on their main site.  Here is the clause at USHomeAuction.com which I only found by Googling for Terms and Conditions. 
   • “The Auctioneer may open bidding on any Property by placing a bid on behalf of the Seller.  The Auctioneer may further bid on behalf of the Seller, up to the amount of the Reserve Price, by placing successive or consecutive bids for a Property, or by placing bids in response to other bidders.” 
7. You will be required to close no later than 21 days after the auction unless otherwise extended.
8. Click for REDC’s detailed Terms & Conditions (not exactly easy to find on the main site - I ended up Googling it).

 Zetabid Foreclosed Home Auction Items to Keep in Mind

1. There is a “reserve price” for the properties.  In other words, even though the starting bid price might be $20,000 on a $70,000 (list price) property and your $25,000 bid is the winning bid, if your bid didn’t meet the reserve price of $55,000, you likely don’t get the property unless the Seller agrees anywayt and the property may be put out for bid again.  Unfortunately, the reserve price is not disclosed to the public so there is no way of knowing what the real minimum price might be.
2. The sale is subject to approval by the seller.  If the seller is not satisfied with your winning bid, the seller can simply decline the sale.
3. Zetabid charges a “Buyer’s Premium” of 5%.  So, if your bid is the winning bid at $200,000, you can expect to pay Zetabid an additional $10,000 which is added to the sale price.  Make sure to factor this in to your calculations. 
4. You are required to bring a $5,000 cashier’s check to the auction in order to be authorized to bid on properties. 
5. When buying a property, you will be required to provide 5% of the total sale price (your high bid price + the 5% Buyer’s Premium).  The initial $5,000 cashier’s check can be supplemented by a personal check.  All of this is due upon completion of a signed purchase agreement by both parties.  Once the deal is final, you likley don’t get this back should you somehow back out of the transaction.  However, if the property is currently occupied, the contract does allow for a 7 day inspection period within which the buyer does have an opportunity to cancel the agreement at no penalty.  Note: When buying a bank owned home through the normal resale process for homes on the open market, earnest deposit here in the Phoenix area generally runs around .0075% of the sale price of the home.  Buyers have a 10 day inspection period to conduct inspections and other due diligence and can cancel the deal at no penalty if they are  not comfortable with the results of inspections as long as they do so within that 10 day period. 
6. IMPORTANT: The Auctioneer can place bids on the behalf of the Seller.  This may be done to ensure a property does meet the reserve price.  Whether this will happen during this auction or not is difficult to know but something to be aware of when watching the proceedings.  Buried in Zetabid’s Terms & Conditions is this one sentence comment.  I did not see an FAQ addressing this question on their main site. 
   • “The Auctioneer reserves the right to place bids on behalf of the Seller.”
7. You will be required to close no later than 30 days after the auction unless otherwise extended.
8. Click for Zetabid’s detailed Terms & Conditions (not exactly easy to find on the main site until you click on the individual listings pages).

 Critical Tips

• If you are seriously looking at buying a property through the foreclosed home auctions and have not had a Realtor search and show you other bank owned properties on the open market, you are making a mistake in  excluding them from consideration.  There are simply great bargains out there already listed for sale and to exclude these from consideration may mean that you are ignoring opportunities that are even more compelling.  Be diligent and research all your home purchase options.
• Come to the auction prepared with your estimates as to what you want to pay for a foreclosed home.  If you haven’t done this, I would recommend not bidding on the property. 
• At the foreclosed home auction, if the bid price exceeds  your estimates for what you want to pay for the property, walk away and let the property go.  Be firm with your estimates regardless of what the crowds may be doing during the bidding process. 
• Look online to see the bidding order or call ahead.  You could be at the auction all day if you don’t know when the house you are interested in is to be auctioned.  Save yourself the hassle by checking ahead.
• On auction day, go a little earlier than the scheduled time for your particular property of interest in order to have time to sit down and watch how the process works.   
• Finally, if you are at all unsure about your buying a home through the auction, then don’t follow through.  Whether it is a resale property on the open market, a new build, or an auctioned property, do not purchase the home if you feel you may have buyer remorse.  Be confident that you are getting the right property at the right value based on your needs and objectives.

Summary

Buyers considering purchasing personal or investment homes at a foreclosed home auction in the Phoenix and Valley real estate market need to understand that the auctions (except the Trustee’s Sale) really represent a distribution method for the lenders to liquidate properties.  There very well may be deals to be had at these auctions but the buyer needs to be fully aware of the value of a property or properties that he or she is going to bid on.  As well, the buyer should be aware of what other opportunities exist for deals outside of the auction process.  Only with all of this information and awareness can the home buyer really ascertain the value of a given home at the home auction and what they should pay for it.

Another great article on home auctions was done up in AZCentral.com.

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