Going Once, Going Twice, Sold to the Highest Bidder!

You’ve probably heard the commercials on the radio or seen them on TV that go something like this;

This weekend only! Hundreds of homes must be liquidated! Bank foreclosed homes at bargain prices! Don’t miss this incredible opportunity! Yada, yada, yada!

Surely, there are some good deals to be had at the real estate auctions but as the buyer you should pay careful attention to the terms of the deal.

Probably the largest and most well known of the real estate auctions held in the Phoenix area are put on by REDC. (Note: These auctions are not the same as the trustee sale, which is the last step in the foreclosure process.) Having worked with clients who have purchased a home via one of their auctions REDC does things right in the sense that they are very upfront about their process and the terms of the deal, which is great. But the purchase agreement allows for very limited buyer contingencies in my opinion. I suspect this is the case with most real estate auctions.

Things to be Aware of When Buying Real Estate at Auction

• As-Is, Where-Is. The seller is always selling the property in the as-is condition. They will not make any repairs, period.
• All inspections must be completed before the scheduled auction date. Not a big deal in terms of the amount of time you have to do this but it is an upfront, out-of-pocket cost that you, as the buyer, will have to pay with no assurance that you will even win the bid and get the home.
• If you win the bid and then find out that there is something wrong with the home and want to cancel you will lose your deposit.
• If there any required permits or certificates, such as an occupancy permit or septic certification, you, as the buyer, will have to make arrangements and pay for those. In a typical real estate transaction these are seller performed and paid for but not so in auction sales. Again, an upfront, out-of-pocket expense for the buyer. And if, for example, the septic system ends up needing repairs before you can get the certificate the cost of the repair will be the responsibility of the buyer and completed before the close of escrow.
• If you win the bid, the deposit is typically a minimum of 5% of the purchase price. So $10,000 on a $200,000 winning bid amount. Not an unreasonable amount but probably more than is typical in other types of real estate transactions.
• The sales contract is lengthy and in my opinion skews in favor of the seller and the auction company. Particularly, when compared to the standard Arizona Association of REALTORS® Residential Resale Real Estate Purchase Contract. There is no inspection contingency, no HOA contingency, and if you don’t use the auction companies preferred lender there will be no loan or appraisal contingency as well.
• There will be no seller property disclosures or insurance claims history.
• Possible monetary penalties if the transaction closes late and it is your fault or the fault of the lender. Of course if it is the fault of the seller they will not pay a penalty, nor will they be liable for any costs you as the buyer, incur as a result.

Due Diligence is the Key to Success

As with any real estate transaction, and especially true of auctions, do your home work before you get in too deep.

• Request a copy of the auction’s standard purchase agreement and thoroughly review it before you begin bidding on a home.
• Take the time, and if necessary invest the money, to get a professional inspection of the property.
• If you plan on financing the purchase get pre-approved for a loan by a home lender before going to the auction.
• If the community where the home is located has a homeowner’s association, get a copy of their CC&Rs (Conditions, Covenants & Restrictions) and review them thoroughly.
• Get an experts opinion of the value of the home. Have an appraisal done or have a REALTOR® do a comparative market analysis. Knowing the value before the bidding starts will keep you from getting caught up in the bidding frenzy and over paying for the home.

Bottom line, when it comes to real estate auctions, there are bargains to be found, but it is easy to get burned so do your homework and don’t get caught up in the bidding frenzy.

As always, if you have any questions feel free to leave comment below or give us a call at 480-820-0043.