Homes on the Block : Southland Buyers Find Homes They Can Afford at HUD Auctions

After more than a year of hunting for their first home, Victor and Eldaa Rivera were unable to find a house that fit their budget.

So their broker, Patricia Soto, suggested that the couple check out the home auctions run by the Los Angeles and Santa Ana offices of the Department of Housing and Urban Development.

It was good advice. The Riveras, who are in their early 40s and renters for the past 15 years, bought a four-bedroom, two-bath Riverside home for $80,000, well within their means, at a recent HUD auction.

“We had been saving for years,” Eldaa Rivera said. “We looked at new homes, but the prices were so high. At the auction, you’re competing with so many people, that the prices are right.”

And more and more home buyers are finding that the prices are right. In the past year, more than 2,000 foreclosed houses in Southern California were sold at HUD auctions. The advantages are numerous:

Besides low purchase prices and a standard down payment of 3%, HUD offers FHA-insured financing for some homes. HUD also pays the broker’s 3% commission, deed preparation costs and other allowable charges to a maximum of 3%.

And while a HUD house can be a good deal, buyers must bear in mind that the properties are sold “as-is,” with no warranties or guarantees, and that failure to close escrow can result in the loss of the buyer’s earnest money.

“The idea is good,” said realtor Ken Cobb of National Realty in Burbank. “But the buyer should be aware that there’s a lot of emotion at the auctions, and it’s important to do the homework.”

Together with Larry Latham Auctioneers, HUD recently began holding periodic open-bid auctions in Los Angeles, Orange, San Bernardino and Riverside counties after several years of a depressed housing market and a faltering economy left the department with a backlog of unsold properties.

According to Chief Property Officer Helaine Mack, the Los Angeles HUD office alone carried 1,700 properties on its books as of July, 1994.

For many years, foreclosed FHA homes have been sold at sealed-bid auctions, and it is still possible to buy homes this way. Listings of available properties are faxed to HUD-registered brokers several times a month. Interested buyers submit bids to HUD in sealed envelopes, and the bid that results in the highest net to HUD is accepted. At these auctions, buyers have only one chance to submit a winning bid.

By contrast, at the more competitive open-bid auctions, buyers can start low and increase their bids by increments, as finances allow, until either they are successful or the purchase price exceeds their limit.

At a recent auction in Universal City, HUD sold more than 200 single-family homes, condos and townhouses, Mack said. Successful bids ranged from $19,000 for an 875-square-foot, one-bedroom, one-bath “insured” condominium in Pacoima to $130,000 for a 1,304-square-foot “uninsured” Altadena house, with many properties selling in the $50,000-$60,000 range.

An “insured” property means that it is eligible for FHA financing. But if a home is in need of extensive repairs, if it has fallen out of an earlier escrow or if there have been a number of foreclosures in the area, it will probably be sold as an “uninsured” property, which must either be purchased for cash or financed through conventional loans.

The average home in the Riveras’ new neighborhood is worth about $120,000, according to Soto, a realtor at Re/Max All Stars Realty in Corona, but when the Riveras first saw their house, vandals had broken all the rear windows and had smashed every single electrical outlet with a hammer. The house also needed new carpets and paint, “and everything outside was dead,” Eldaa Rivera recalled.

On the plus side, the house had a fireplace, central air and heat, a good-sized garage and “something we weren’t looking for,” she said, “a swimming pool.”

“It needed work. Don’t think that it was beautiful. But the price was so low, we could afford to repair it.” Now, she added happily, “Nobody believes the condition the house was in.”

Deterioration and vandalism are common in foreclosed properties, and, although the degree of damage varies, few homes are in move-in condition.

For some buyers, such as Beatrice Bell, who purchased her first HUD home in 1974, a fixer-upper is just what they’re looking for.

“I prefer a HUD house,” Bell said. “You can take your own time to fix it up and make it yours, and the cost is right.”

At a recent auction, Bell was prepared to bid on a three-bedroom, two-bath ranch house, but dropped out when the bidding exceeded her budget, illustrating one of the cardinal rules of auction buying: Decide on the top price you are willing and able to pay for a property and hold firm.

There are several other steps you can take to ensure that the property you buy isn’t a white elephant masquerading as a bargain.

First and foremost, talk to your lender and determine what you can realistically afford to pay for a home. Because of the short escrow period (30 or 45 days), you must be pre-qualified for a loan before you can buy property at a HUD auction.

“Start working early,” stressed Sue Troxcil, loan officer at Western Cities Mortgage Corp. “There are a lot of programs out there. Even if your credit is not perfect, you may still be able to set up financing. It will just take longer.”

Once you have an idea of how much you can afford to spend, study the free auction brochure and pick out several homes that meet your space and location needs.

While the Los Angeles HUD office requires you to work with a real estate broker, it’s optional in Orange and Riverside counties, but it’s a good idea in any case. A broker who knows the area and the current market value of similar homes will help prevent you from overvaluing the property.

Next, with your broker, carefully check out each home that interests you. Auction properties are open for inspection 10 days before the sale. Because the catalogue pictures can be deceptive, an on-site survey is crucial to making an accurate evaluation of needed repairs and any zoning or code violations.

“Some of the homes we saw, all they had were walls,” Eldaa Rivera said. “And even though you look, you don’t know if the electricity or water works. These problems really concerned us.”

Although HUD will not pay to turn on the utilities, it is sometimes possible to arrange to have them switched on for a couple of hours at the buyer’s expense, Cobb advised.

Cobb, who himself lives in a HUD home, added that if there are serious reservations about a property’s condition, it could be worthwhile to hire a professional inspector, who, even if the utilities are not working, may spot foundation and structural problems that would otherwise be missed.

After deducting the estimated cost of repairs and remodeling from the market value of the property--and remember to include the time needed to complete them in the equation--you should have a fairly good idea of what it is worth to you.

Because Bell works for a Pasadena social service agency and does not want to commute, she chose to bid on only one property--the sole house up for auction in nearby Altadena--but the odds for a successful bid are better if the buyer is able to be flexible about location.

Although properties are available throughout Southern California, the selection in some areas is limited. At a Los Angeles County auction, a number of homes were for sale in Lancaster, Palmdale, Pomona, Long Beach, Carson and Compton, with relatively few in Pasadena, Canoga Park and Torrance.

The Riveras were fortunate in that they both worked in the Riverside area, where there is a larger selection of properties. Their new home is 10 minutes from Eldaa’s job as a health educator for Riverside County and 15 minutes from Victor’s work in shipping and receiving at Target stores.

HUD holds free pre-auction buyer awareness seminars to help familiarize prospective buyers with the dynamics of the auction. Bidding, financing and closing procedures are gone over in detail. Although attendance isn’t mandatory, it’s a good place to ask any last-minute questions--and you may be surprised at what you learn.

During a practice bidding session at one seminar, for instance, everyone laughed when the auctioneer managed to sell a $20 bill for $25, but he effectively made his point: The competitive spirit can suck you into an impulsive bid if you’re not alert.

On the day of the auction, bring a letter from a HUD-approved lender stating that you have pre-qualified for a specific mortgage amount. You’ll need this to register as a bidder. If you plan to bid on an uninsured property, you must provide a letter stating that you have sufficient funds to pay the entire purchase price by the time escrow closes.

You’ll also have to bring $1,000 earnest money in the form of cash, cashier’s check or other certified funds, which will be forfeited if escrow fails to close. Investors who intend to purchase more than one property must present $2,000 for each additional property.

After you have registered, you’ll be handed a large white card with a number written on it. This bidding card is raised to place bids during the auction.

Once bidding gets under way, things move quickly--a property is sold, on the average, every 2 minutes. “The average consumer is so much more educated about government programs that the competition at HUD auctions is stiffer than it was a few years ago,” Cobb warned. Still, most brokers agree that the properties generally sell for under-market value.

As each property comes on the block, the auctioneer announces its address and, to avoid confusion, a large video screen displays the catalogue photograph.

Pit consultants dressed in blue blazers and red ties are employed by the auction company to relay bids from the floor to the auctioneer. Notify the consultant in your area which of the properties you will be bidding on, and he will try to keep an eye out for your bidding card. It doesn’t pay to be too timid, however. Some prospective buyers have complained that they were ignored in the heat of a bidding war.

The auctioneers work hard to get the highest possible sale for HUD, and the excitement is contagious.

“It’s so wild,” Eldaa Rivera laughed. “Things go so fast. In a matter of 30 seconds the house is sold. You don’t have time to think. We decided not to go over $80,000 because of all the repairs that were needed. Someone else could have bid $81,000. It’s nerve-racking.”

HUD will not accept bids below a base, or “reserve,” price based on the length of time the property has been in inventory and the department’s estimated cost of repairs. If there isn’t enough interest in a property or if the bids are deemed too low, the auctioneer will suspend bidding until a later time.

Or HUD may decide to sell the home “absolute,” meaning that the highest bid, whatever the amount, will be accepted, providing there is a minimum of two non-related bidders.

If your bid is successful, you and your broker move on to the contract room to complete the HUD sales contract. Then, at the close of a short escrow, the property is yours.

Is the end result worth all the work?

“Yes,” said Eldaa Rivera, without hesitation. After many years as renters, the Riveras now own their first home. It took them a month to get the interior into livable shape, and they still want to paint the outside of the house.

“At first we were very, very tired,” Eldaa said. “Now we’ve been here for four months. We have put our own touches on the house. We didn’t get the one we really wanted--it went for $90,000--but maybe we got the house we were supposed to have.”

Svitil is a Los Angeles free-lance writer.