Articles

Friday, July 25, 2008

Hey, bidder! Going once. Going twice. Sold!

Until this year, NRC Realty Advisors LLC hadn't coordinated an open outcry auction of homes since 1994.

But with the real estate market in much the same shape it was in the early 1990s, NRC got back into them, as builders and lenders again look to auctions to dispose of homes and lots that aren't selling through conventional means.

NRC's move appears well-timed. Last month, 350 people - some serious and some just curious - ventured to an Itasca hotel for an auction of 53 homes that belonged to Neumann Homes, which filed for bankruptcy late last year. Subject to court approval, 41 homes sold during the auction.

Industry insiders like NRC and other firms that see an increased appetite for auctions, both by sellers and buyers, predict that the sales practice will be part of the residential landscape for some time.

"I think you're going to see auctions used extensively over the next 18 months to wring out the excess of this market," said Rick Levin, president of Rick Levin & Associates. "There's too much inventory out there."

Auctions give buyers validation that their interest in a property, and what they're willing to pay for it, is on the mark despite the industry's troubles because they're sitting in a room with other people who want the same home or lot.

The final selling prices can be up to 10, 20, even 40 percent off the prices the properties would sell for conventionally today. Typically, the biggest discounts are available in neighborhoods heavily affected by the subprime loan debacle.

However, auctions are not for the faint-hearted or homework-averse. The biggest mistake consumers make, according to auction companies, is not doing their due diligence about the properties and their own financial health beforehand.

Properties can be sold "absolute" to the highest bidder or with "reserve," which means the seller can reject or accept an offer, subject to a minimum bid being met. But based on the mood of the room and the pace of bidding, a property can start at reserve and move to absolute during an event, too.

Auction houses strongly advise prospective bidders tour any house that they might have even the slightest interest in, and feel free to bring their real estate agents, contractors (in case homes are unfinished) and home inspectors. Some auctions require, and all recommend, that prospective bidders obtain letters from lenders showing the maximum amount consumers are pre-qualified or pre-approved to borrow.

That goes hand-in-hand with knowing how much cash to bring to an auction and the terms of sale. Winning bidders must turn over a cashier's check for earnest money and additional funds to cover up to 10 percent of the winning purchase price. Buyers also need to factor into their costs a buyer's premium, which is a percentage of the final purchase price that goes to the auction house.

Levin occasionally hears winning bidders approach the table saying "Oh, I wonder if I can afford this." He said, "I don't see how anybody can go buy a house when they have no clue as to what they can afford."

It's also a good idea to have a lawyer look over a sample of the contract that must be signed by winning bidders at the auction; most of the documents are available on auction company Web sites.

Because there are no contingencies available regarding the sale of an existing home, auctions frequently aren't the best option for current homeowners, unless they have a good sense they can sell their own house quickly. Most properties sold through auction close within 30 to 45 days.

"[Buyers] are taking these aggressive upfront, calculated risks to save a lot of money," said Christine Kempa of The Auctionator, Homer Glen. "Auctions were used in the past to raise the price over asking. Right now, the auctions are being used to get better deals" for buyers.

And not all deals happen at the auction itself because not every property that crosses the block hears going, going, gone.

Bidders who walk away empty-handed are welcome to call the auction company in days after the event to see what homes remain and whether any deals fell through.

Auction coordinators frequently conduct education sessions before an actual auction to teach potential bidders about the process. Some even have bidding assistants working the floor at the auctions.

"You can't really change your mind so easily as you could in a normal purchase," said Evan Gladstone, executive managing director, NRC Realty Advisors. "No question is dumb. Don't be intimidated. You're the buyer. It's your money."