Use Caution at the Foreclosure Auction

Peter Viles of the L.A. Times’ excellent real estate blog L.A. Land, attended a foreclosure auction in Pomona over the weekend and blogged about it here.  The thing about these auctions is, people go expecting to get a good deal, but it’s easy to get caught up in the emotion of the action and end up overpaying.bid.jpg

There are “opening bid” prices that the auction uses to lure you in, but there is also a “reserve” price that has to be met for the home to be sold.  For example, the opening bid could be $100,000, but the reserve could be $200,000 or more.  If the reserve is not met, no home for you.

Furthermore, it’s common for the auction company to put “plants” in the audience to bid against interested buyers and jack the price up.  The action is fast and furious, the adrenaline is pumping, and you could find yourself committing to paying more than you intended, or you should.

And that’s not all, at least at this auction, Viles writes:

Two very important notes: Buyers agree to pay an extra 5% as a “buyer’s premium” to the auction companies. Also, the high bidder does not necessarily get the house. The owners of the homes — the banks — reserve the right to reject the winning auction bid as too low.

Five percent is a huge amount of money — $25,000 on a $500,000 home!  In his post, Viles details the first 10 homes auctioned off: what they were last listed for and what they went for.  One was a home in Lomita last listed for $529,000 that went for $505,000.  Tack on the buyer’s premium, and you’ve got a home that went for more than its last listed price.

I bought a home in Riverside County during the last downturn in 1993.  It was held by a new-home builder trying to unload the unsold homes in his tract.  There was no buyer’s premium, and we bought it for $142,000 — about 25% less than our neighbors paid.  Still, we remained upside-down by about $15,000 until 1999, when we sold and got $6,000 back at escrow.

If you’re planning on trying to snag a house at one of these auctions, be smart.  Thoroughly research the home and the comps before you go, including touring and inspecting the property.  Then — this is very important — decide beforehand how much you are willing to pay, and be ready to walk away if the bidding goes higher. And when you’re deciding on that price, don’t forget to factor in the buyer’s premium.

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