Don’t like the back-and-forth bickering involved in home buying? Maybe you’ll buy your next home with just a quick back and forth wave.
More homes are being auctioned than ever, with some $16.9 billion sold by private auction houses last year. That’s not counting the foreclosed properties sold at sheriff auctions.
That’s still a tiny slice of residential sales, but auction houses are anticipating residential sales could boom soon.
Bailout boon for auctions?
With the $700 billion bailout bill, the federal government has entered the home loan business in a big way, and will inherit lots of REO properties.
“REO” is lender lingo for “real estate owned,” and refers to the homes that banking companies own after they’re not sold at a foreclosure auction.
Indeed, when a foreclosure is finalized, a public auction is held. Professional investors, not ordinary homebuyers, tend to be the purchasers at these public, or sheriff auctions. It’s the domain of professional buyers, because of thorny issues like possible unpaid taxes on the property, or the inability to inspect the inside of the home.
With the influx properties coming on sheriff auctions, more are unsold and remain the property of the lending firm. One study, performed by the nonprofit Woodstock Institute, finds that in the Chicago region only 6 percent of properties were sold at the foreclosure auction in 2007.
When the government buys up home loans where the underlying asset is an REO home, many expect that Uncle Sam will start selling the properties at auction.
After all, the last time government took ownership of lots of properties was during the savings and loan crisis, and that was a huge boon for the auction business, notes Chris Longly, spokesman for the National Auctioneers Association.
This time around, it’s still not certain whether the many private auction firms around the country will be used to sell off properties, since other ideas are floating around, notes Stephen Martin, president of The Gwent Group, a Bloomington, Ind. consulting firm.
Bargains for the bidding
But there’s already a big bump up in REO homes placed in auction by lending firms themselves. Supply is also coming from builders unloading unsold new construction and from frustrated home sellers who turn to auctions for a quick sale.
Rick Levin, president of a Chicago-based auction firm, says that REO properties have been selling at between 10 percent and 20 percent of the appraised value of the home. “But you could argue that appraisals these days aren’t very on target; and that an auction sets the ‘real’ price of a home in today’s market,” says Levin.
Successful auction buyers have to worry about more than simply waving a bid at the right time.
When buyers purchase a home the traditional way, directly through a seller, they typically submit a purchase contract that contains contingencies, like the ability to get out of the deal should their financing not come through. Another typical way purchase contracts fall through is when a buyer orders an inspection of the property, and finds faults that the seller won’t remedy.
But with an auction, successful bidders don’t have these options to get out after they’ve struck the deal.
Many firms require at least 5 percent or 10 percent of the price of the home in cash, as soon as the bidder wins a property. Then, the buyer must close on the sale in 30 days or so. If his financing falls through, he loses that initial deposit, notes Tommy Williams, past president of the National Auctioneers Association.
What’s more, the home is typically sold “as is,” meaning that you can’t expect to get out of the purchase because you send an inspector who finds a leaky roof or other fault.
Homework comes first
Auction buyers do have a chance to inspect properties — before the auction date. Most auction houses advertise the upcoming sale in local papers, and buyers can inspect homes, as well as pick up packets with information like the property’s plat of survey, during certain advertised times.
Moreover, most firms provide real estate agents with a commission if they bring buyers to the auction, and agents help buyers judge the value of properties.
In today’s tight lending environment, auction bidders can’t be too careful about ascertaining a home’s value, warns Jorge Gomez, president of the Illinois Association of Mortgage Professionals.
It’s possible that a buyer could be approved for a certain amount of mortgage, but then a lending firm doesn’t like the amount he bid for a home. “Appraisals coming in short is the biggest stumbling block we are finding for loans not coming through,” says Gomez.
Before they bid on a property, Gomez suggests asking ;a lender for referrals to a certified home appraiser who can peg a value on the home. That may cost a few hundred dollars, and the auction buyer will have to pay for another appraisal ordered by the lender if he actually goes through with a purchase and formally applies for a loan, but the extra expense is worth it if it helps guarantee that you’ll get your loan, Gomez warns.
Sometimes, the auction firm teams with a lending company to provide financing on the properties. Using one of the partnering lenders means that the lender may be more familiar with the value of a particular property. Still, consumers may want to consult their own lender to ensure that the rate and terms offered are competitive concludes Gomez.
Marilyn Kennedy Melia is a freelance writer in Northbrook, Ill.