Foreclosure Auctions

There are a couple of kinds of foreclosure auctions. One is the true, no-reserve auction, where buyers typically pay cash for properties they may never have even seen the insides of. While deals can be had, you are bidding against very savvy investors who know the market, have oodles of cash, and play for keeps. If you win one of the auctions, you may have overpaid — because the professional investors let you have it.

A second kind are the “auctions” which have been advertised all over the place over the last two years. Several companies take out huge color ads in the newspapers listing properties for amazingly low prices. (One such company is even affiliated with the LA Times.) What’s the catch? Actually, there are a couple of significant downsides which you must investigate (not all companies are exactly alike) before showing up with an earnest money check.
The first catch is, like regular REOs, the properties are usually sold “as is.” While you may get a chance to see the inside of the property at an open house just prior to the “auction”, another catch (besides the huge buyer’s premium that you pay on top of the winning bid) is buried in the fine print of the auction manual. Believe it or not, some companies apparently use “shill” bidders to drive up the price. Nice! (Before you decide to attend a REDC auction, you might want to try a Google search on REDC and “SCAM“.)

Auctions bring out a lot of buyers — many of whom, like newbies on eBay, will simply overpay. So, I’ve wasted my time checking out any properties that have other bidders who are unaware of the true market value of the property, because the suckers will outbid me every time. I’ve even heard stories of properties that had been listed (and languishing) on the market sold at “auction” for more than they had previously been listed for. (If anyone has a real life example of such a property please email it to me so I can blog about it.)

Yet another problem is that these properties are rarely in a desirable area. I see a lot of listings in places like Victorville. Uh, sorry, isn’t that the place out in the desert where people are literally tearing down brand new houses ? Not sure I really want to go there, even if they gave me the property.

The final deal breaker for me, though, is that these are generally not “absolute” auctions: the sellers keep a “secret reserve” price so that even if you are the high bidder, there is no guarantee that you will get the property that you want at that “winning price.” I personally refuse to waste my time bidding against a population which has been whipped into a frenzy by an expensive marketing campaign just for the opportunity to negotiate regarding the purchase price if, and only if, I’ve already made the high bid of the day. Thanks, but no thanks.