According to the National Auctioneers Association, $58.6 billion in commercial and residential real estate was sold at auction last year, an all-time high. One leading auction company, REDC, has already sold 1,200 properties in Chicago this year, netting $33 million. By 2013, nearly a third of all real estate will be sold at auction, the NAA predicts.
Maybe it's time to learn more about this exciting way of buying and selling, which holds far fewer risks than most people believe.
"The primary perception is that auction homes are foreclosures, or dilapidated homes in bad areas. That is a myth," says Brian Kuzdas, owner of RealEstateAuctions.com in Chicago. There are people who come to us who want to sell by way of auction because it's a great way to sell."
Auction advertisements tout vacation condos in Mexico, pieds-a-terre on the
, new construction closeouts in the South Loop, luxury homes on the North Shore, subdivision lots, and plenty of handyman specials that can be had for the cost of a car. They may be foreclosures or they may not be; regardless, the transaction process is the same for the buyer.
Advantages of auctions
Why are auctions so popular? Because they work for everybody. "Auctions work in this market because they're quick, efficient, public, and they set the market price," says National Auctioneers Association Deputy Executive Director Chris Longly. Auctioneers say buyers and sellers like auctions for the same reasons:
Buyers can name their own price.
All bidders are treated fairly with the same terms.
Auctions eliminate long negotiation periods.
Buyers receive a clean title with no liens or back taxes.
The seller is committed to selling.
Real estate auctions have a very high closing rate (90-100 percent is common.)
Mitigating the risks
Like any real estate transaction, there are the risks involved. But they can be reduced when both the auction house and the bidders have done their due diligence.
For example, homes at auction are sold as-is. There is no attorney review period or negotiation after the auctioneer shouts, "sold!" (Potential buyers are encouraged to take a sample contract to their attorney beforehand.)
However, that does not mean buyers can't inspect the home before the auction. These days, most auction companies hold open houses during the weeks before the auction. They also provide detailed written reports on the homes to be auctioned. "We strive to deliver all the due diligence information about the purchase before they bid that includes a home inspection, a survey of the property, all the facts," says Michael Fine of Fine & Co.
One exception is the judicial auction or sheriff's sale. This is where the local government has ordered the property sold. These homes are not made available to the public beforehand.
The prices at auctions often outweigh any perceived risks in the minds of buyers. Srinivas Reddy recently bought three new townhomes in Roselle for $85,000 each. They were once $220,000. "I paid less than I thought I would pay," he says. "The properties I bought were a builder's close-out, so repair issues were unlikely. The units I bought have performed wonderfully and are all rented." He also bought his own home for $170,000 at a separate auction, which was originally $420,000.
David Litvinov bought his River North condo at a judicial auction. He said the 15-20 percent discount he received made it worth it, even though it needed some repairs.
Preparing to buy
If you think you want to buy at auction, sources are unanimous on one point: attend a real estate auction first.
They are not hard to find. They are advertised extensively in newspapers, on billboards, and online. Or get on the e-mail lists of local auction houses. You'll find a lot of great information there, including extensive FAQs about the auction process and each company's requirements. For example, Rick Levin & Associates (ricklevin.com) has video tutorials as well as testimonials from satisfied customers.
Assessing your finances is extremely important before buying at auction. If you need a loan, you must be sure you can get one beforehand.
Bidders typically must bring between 5 and 10 percent earnest money with them to an auction. If they win, they must close within 30-45 days. If they cannot close, they forfeit all their earnest money to the auction house. Auctioneers say these requirements make the auction process successful by weeding out unqualified buyers.
A judicial auction, mentioned previously, requires buyers to pay with cash on the spot, or within a few days afterward.
Because of these requirements, many auction houses now offer financing, or assist buyers in getting it in time for the auction.
Diliberto Real Estate Services provides alternative financing resources. "If a buyer comes to the table, we can have approved lending already established so the buyer comes to the auction ready," says Frank Diliberto. "We bring third-party lenders to the table so they can get pre-approved more quickly."
The Chicagoland Real Estate Auction offers seller financing for up to 95 percent of the cost. "The buyer makes a monthly payment to the seller over 15 years, with interest," explains owner Tim Gray. "It is not a mortgage, it's an installment contract." Though the interest rate is higher than a conventional mortgage, Gray says the numbers work for very low-cost homes. "We just sold a home for $20,000, with a $384 monthly payment," he says. "You can't even rent a place for that."
Websites such as RealtyTrac.com, Trulia.com or Zillow.com are good for researching comparable properties online. Your Realtor also can do research and find auctions by searching the MLS, which has an auction search function. (By the way, more and more auction houses are paying commissions to Realtors if they bring a winning bidder.)
Once you have found a property, attend the open house and bring any professional whose advice you value. Make sure you get all the necessary figures: monthly assessments, property taxes, an estimate of repairs that need to be done. In addition to those costs, the auction house may charge a buyer's premium. This is a fee (3-5 percent) that the buyer is charged on top of the high bid price. It covers the marketing costs.
John Sturm prepared for an auction at 1400 Lake Shore Drive recently by making an "elaborate spreadsheet" that calculated the total cost of the condo he was interested in, at different price points. That way he knew how high to bid.
"The auctioneer put a group of units on the platform at once, and it was high bidder's choice," he says. "This is where the highest bidder picks the one they want, then they do it again. Nobody we talked to had ever been to a high bidders choice auction, but they went through a few sample rounds first."
In the end, Sturm got a 6th floor unit overlooking Lake Michigan for less than $200,000.
"We got the exact type of unit we wanted in the location we wanted," he says. "We paid slightly more than we had hoped for. But we still paid much less than we would have had we gone through a private seller."
Learning the lingo
Sturm's experience illustrates how it pays to familiarize yourself with auction terms beforehand. The most important thing is to find out what type of auction it will be: Absolute (no pre-set minimum price); Minimum Bid (the bidding starts at a predetermined price); Reserve (the seller gets three days to accept or reject the high bid).