Auction

On one of the days that I was sitting at the open house, I met a young lady that was actively looking for a home. She is currently renting a home that is going to be auctioned off for non-payment of the mortgage. Nice, right? She's losing her home because the owner decided not to pay his mortgage payment with the money she paid in rent every month. So A and her mom M asked me to help them find a home for A. Mom flew in from Florida to help pack up the old place and find a new one. I've mostly worked with M these past two weeks, sorting through homes, ruling out the worst and making one offer on a really nice home. Which, by the way, we lost out to an investor. I have no problem with investors in general. But when I show my client a home at 9:05 in the morning, after it shows up in the MLS at 10:00 the night before, and find out from the listing agent that it already has 8 cash offers over the asking price, I get a little peeved. How can my client, who is FHA qualified, hope to compete with that? We offered well over asking price (slightly over the comps) with the only request being that the bank pay her closing costs (hence the over the comps offer price). We lost out. To an investor who, if the the local newspaper is correct, will turn it into a rental home. And this is happening every day. Hmmm, people buying houses sight unseen for over asking price...smell a little bit like another housing market to anyone else?

Last Thursday, M called me to ask if I would go with her and A to the big auction that's in town this weekend. The open house I had met them at was one of the properties being offered up for sale and they wanted the opportunity to try and get it. I've never been to an auction. I'm game.

There's a whole process of registration that the auction people make you gyrate through as both a bidder and as an agent. I filled out my paperwork and printed it out as directed. I got my broker's information and signature as required. I printed out my license like I was supposed to. I was ready.

I met with A & M about 10 miles from my house at 7:00 am on Saturday. Registration started at 8:00 downtown and we didn't want to be late. Knowing what I know now, we could have taken our time getting down there. But we didn't know, so we got there on time.

We waited around for about 15 minutes until they officially opened the registration. There was some confusion about how to register and what papers you needed to do so. Turns out that they didn't want to see most of what the website had told me was required. We got through that fairly quickly and headed in to the auction room.

You walk into the huge room and see about 500 chairs set up in rows. There are four large screens at the front of the room. The two middle screens will be where each property's photo is put up while it is being bid on. To the outside of those screens are screens that have a grid of the property numbers. There are four pages of property numbers that scroll continuously throughout the day. As each property is sold, a green box will appear over the number. In front of the middle screens, there is a stage with two podiums on it. On either side of the stage, are two long tables with beautiful people seated in front of computers and printers. Throughout the day as each property hits it's final bid, one of the beautiful women from the table to the right of the stage walks a piece of paper to one of the beautiful men seated at the table to the left of the stage.

When the show starts, there will be two people on stage. On the right side, there is an announcer whose job it is to tell us which property is being bid on and the opening bid. Then the auctioneer takes off on his spiel. There are two different auctioneers at this auction and each works for about an hour before trading off.

The real show though are the bidding assistants. All men, most really good looking, all reminding me 8 year old boys with ADHD. They are in constant motion. Especially their eyes. They all pace constantly, looking for someone who is ready to bid, watching for someone to wave their bidding card. Even when they're walking a straight line their eyes are scanning back and forth over the crowd. Wherever the bid is at, the assistants are signing it with their fingers. The numbers 1-5 are shown by the appropriate number of fingers, 6 is a thumb up, 7 is a crooked index finger, 8 is the middle crossed over the index and 9 is a thumbs down. And they yell. A lot. They do actually help the ones who are bidding to stay focused on where the bid's at and to prevent them from bidding against themselves.

Remember how I mentioned that that we got to the auction on time? Yeah, no need for that. They bid the houses by number and the numbers are given to each home based on the area that house is in. They auction off all the houses in a given area at one time and then move to the next area. Our house? Was in an area that they didn't get to until late afternoon. So we sat there for about six hours before they even started on our area. That was a bummer. I guess we could have gone to lunch or something, but they really didn't want to miss the opportunity to bid so we stuck around.

Just prior to the house my client wanted came up, M signaled to one of the assistants that we would be bidding. He came over as soon as the house popped up and gave A directions on what to do. He told her not to bid first, not to bid until it got going, to wait until it was down to her and one other bidder. She did as he instructed and ended up with the winning bid.

Now, here's where it gets interesting. The winning bid does not necessarily get the property. I know. It makes no sense. No, the bank has a "reserve" price and if that price isn't met, they don't have to take your bid. They have the option to accept, decline or counter your bid. The best part about that is that nobody knows what the reserve price is so there's no way to know how far off you are and what your chances are of actually getting the property.

But wait, there's more. The auction company puts a 5% premium on the winning bid to cover their costs. That premium, is paid by the buyer, not the bank. Usually, the seller pays for their costs out of the sale price, but not at an auction. Okay, so you have the "maybe" highest bid and now we add 5% on top of that. Now, you need to put 5% of that price down as your earnest money. Your earnest money that goes hard immediately. There is no "cooling off" period at an auction. There is no inspection period after purchase. There is no financing contingency. If you can't get financing, you lose your earnest money. And I don't mean if you can't get the financing you want. I mentioned that my client is FHA qualified. If FHA doesn't appraise the house and won't finance her, she either needs to go 10% down conventional or lose her earnest money. There is no option to just back out. For someone who is a first time home buyer with not a whole lot of cash on hand this could be devastating. My clients asked my opinion and I had to tell them that it was their choice. The house certainly has the comps to back the price they bid and then some. It's a newer built house in good condition in what appears to be a nice neighborhood. But there's no telling what the bank will say. So now we wait for a week or two to find out whether the seller takes their bid or not.

My overall impression of the auction would have to be that it wouldn't be something I would personally do. I also would not recommend it to someone who was trying to go FHA or was a first time buyer as there could be a lot of risk to them. I would also suggest that there is an inherent unfairness in the process as it seems to put all of the risk and all of the costs on the buyer. I get that they need to do their due diligence and check out the homes they are interested in but that's not the same as a full house inspection. And nobody is going to pay for a full house inspection on a property that they have a good chance on not getting anyway. My advice on this is buyer beware and do your homework.