Wednesday, May 21, 2008

Las Vegas Real Estate Auctions

(Originally posted on March 16, 2008)

Are they too good to be true?

If you've seen the commercials on TV, heard them on the radio, visited the websites or picked up the booklets -- you know that "The Lender foreclosed home auction is coming" and "265+ homes MUST BE SOLD!" Rather than exploring the hype, I want to show you the reality of what's being offered.

Caveat Emptor

You may have heard this Latin term before which means "Let the buyer beware," but more specifically it is a property law doctrine that controls the sale of real property (real estate) after the date of closing. When you buy a foreclosure, it's simply stated as an "As-Is" purchase.

Regardless of whether you buy a foreclosure at auction or as an MLS listing, it will always be sold as-is. To protect yourself, you need to perform your due diligence, which is gaining access to the home and having structural and mechanical inspections completed before you agree to purchase.

Why buy at Auction?

This is the question posed on page 3 of the auction brochure. In my personal opinion, this section is pure marketing, and I'd like to counter some of these claims:

Here's their pitch: "There are many reasons to buy foreclosed homes at auction. First and foremost is that you set your OWN price. You are not at the mercy of a seller's unrealistic "asking price." Other benefits include:

* No long negotiation period with offers going back and forth
* Huge selection of homes at rock-bottom auction prices
* Our Sellers are the lenders who own these homes. They are VERY motivated to sell these homes and sell them now!

Sounds exciting and great, right? Well, let's read the small print.

The process of buying at auction

First you need to register to participate in the auction - that's free. You go to Then you need to get pre-qualified (no cost or obligation). So far, so good.

Now you look through the catalog or review the homes on the website and pick your favorites. Then you visit these homes during the open houses held the weeks prior to the auction. The company advises you to "visit every property you would consider bidding on. Make an informed buying decision, go out and thoroughly inspect each property you are interested in."

Okay, let's start right here. Unless you are a home inspector by trade, you will need to schedule the home inspector to be at your potential new home during the open house. The utilities will have to be on (many times they're not and there's nobody to ask in advance to turn them on), so that all systems can be tested. This inspection will cost you, depending on the size of the home, anywhere from $200-$500. For argument's sake, let's say you do that, and the report comes back to your satisfaction.

Day of the Auction

To participate in the auction, there is no admission charge and no registration fee. Excellent! You need to bring a cashier's check for $5,000 (payable to yourself) or cash, and your checkbook. When your new home comes up for bid, you are asked to bid up to your maximum amount.

If you are the winning bidder, this is what will happen next. First a 5% premium is added to the price of the home, which becomes part of the total purchase price. You will then sign documentation confirming you are the winning bidder. Since you've been pre-qualified for a loan already, your financing and documentation will be done right then and there.

Then you sign over your $5,000 cashier's check, which gets deposited into a Trust account with a national title company (all is still good.) You also need to write a check for the balance of what equals 5% of the Total Purchase Price. After that, you will be required to close within 30 days.

Let's take a look at their example:

Your winning bid - $200,000
5% Buyer's Premium + $10,000
Total Purchase Price $210,000

5% Earnest Money Deposit $10,500
$5,000 Cashier's check - $5,000
Remainder - Personal Check $5,500

I think most readers might stop right here. Why? Right now you can buy a house up to $400,000 (including almost every foreclosure), get FHA financing with only 3% down, and the seller can contribute to that or pay that downpayment for you. You are also not rushed into spending money on an inspection for a house you may not "win" at auction.

Let's dig deeper...

Everything about the auction is on the up and up. I don't want you to think that it's anything less than that. What I'm trying to point out is that purchasing a home conventionally (using a Realtor) is almost always a smoother, saner and safer way to go. (And I can almost certainly guarantee that you will pay less than at auction.) Why? Because the banks can only lose so much money on the house! The ads may say "MUST BE SOLD" but it's not true, and the auction tells you so.

I'm going to use one of the homes listed for auction as an example. The home is located in Silverado Ranch with a starting bid of $109,000. It says "Previously valued to $290,026." This home was just removed from the MLS yesterday, I presume, in preparation for the auction. It was listed as a foreclosure sale with a price of $239,900. According to the County Assessor's office, the bank paid $290,296 (ah, there's the origin for the previously valued amount.)

My question to you is this, "Do you think if the bank only gets one bid on this house for $109,000 - that they will sell it to the winning bidder?" I highly doubt it. Here's why:

The disclosure that safeguards the auction house and lender is located under the "Terms and Conditions" section of their materials. It is in #3, Bidding and Buying at the Auction, and is labeled, "Reserve Price: All Properties have a Reserve Price, meaning the Seller of each Property has established an unpublished, minimum selling price. The starting bid is not the Reserve Price." In other words, the buyers bidding must meet or exceed this secret reserve price, have the highest bid AND the bid must be accepted by the Seller "subject to confirmation."

Are you still with me?

Gee, I admire your fortitude. Let's cover "subject to confirmation" for a moment. According to the auction company, "if your bid is not immediately accepted by the Seller, the Auctioneer will inform the Winning Bidder that their winning bid is subject to confirmation. You agree that your purchase is contingent upon the Seller approving the purchase, which is at their sole and absolute discretion within 15 days of executing the Purchase Agreement. If the Seller chooses not to sell, you will get your $5,000 plus the check you wrote back. Hmmm. Wait, I'm not done yet.

Financing your purchase

So you got pre-approved to buy your new home. Now the lender has to do an appraisal of the property. Due to the physical condition of the property, your lender may not provide financing to you. If you pre-qualified through the auction's designated lender but cannot get financing for the home, you will get your earnest money back. The terms only mention the designated lender, not any other lender.

Well, there's gotta be an escape clause for you, the buyer, right?

Uh, no. Only if you use the designated lender and you don't get approved, then you'll get your money back. If you use your own lender and you don't get approved, you lose. If you find something wrong with the home after you win the bid, you lose. Read the "Due Diligence" portion of the Terms and Conditions carefully before even considering purchasing one of these homes. If the words don't make sense, consult an attorney or someone knowledgable that you trust.

A saner alternative

While the prospect of saving tens of thousands of dollars is enticing, the reality might be somewhat different when purchasing through an auction. As an experienced Realtor, using my services (for free) allows you to be protected every step of the way through the purchase, to have safeguards from buying blindly and to have control of much of the process.

Here's the difference in the process, and the peace of mind that I can offer:

1 - You get pre-qualified with a lender.
2 - We discuss the details of the type of home you want and possible locations.
3 - I show you homes meeting your criteria, and continue to inform you of new listings as they are posted for sale.
4 - I physically preview homes you are interested in, if you wish, to reduce unnecessary running around.
5 - When we find the home you desire, we submit an offer, on your terms, to the listing agent.
6 - I negotiate on your behalf and I work towards getting your offer accepted.
7 - The offer will be contingent upon inspections done to your satisfaction and final approval of your loan. If you are unhappy with the condition of the home, or don't get loan approved, you will receive your earnest money back (usually a much smaller amount than 5% of the purchase price - normally $2,000, depending on the price of the home.)
8 - You are not operating in the dark, have representation from a Real Estate professional, have a source for any answers you seek and total peace of mind.
9 - I accompany you to your closing at title, explaining any uncertainties and I am your agent for life, after you've moved into your home and for years to come.

I hope this has been helpful as an insight into the auction process, and buying a foreclosure home in general. If you need any specific questions answered, feel free to contact me anytime.

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