Internet auctions: pitfalls and potential

Times Staff Writer

As the nation prepares to pay the price for years of unfettered property speculation, a collection of online companies is hoping to cash in on an oncoming wave of foreclosure sales by auctioning distressed homes online -- with significant consequences for homeowners as well as purchasers.

Next month, Duval County in Florida will be the first in the country to hold an Internet foreclosure auction, forgoing the traditional courthouse sale in the hope of attracting buyers from other areas.

If the sales proceed and other states sign on, it will be an earth-shifting change in the way foreclosures are handled because it will eliminate a key requirement meant to protect homeowners from unscrupulous lenders.

By law in California -- and every other state save Florida -- lenders may not simply claim that a homeowner has defaulted on payments and move to take over the house. Instead, they must hold a public sale, in the county where the property is located, after notice has been provided to the borrower and the sale has been advertised.

Internet sales will also have important ramifications for bidders.

Because potential buyers may be out of the area, many won't be able to fully research the properties and might wind up, as happens even in courthouse sales, finding faucets with no running water, foundations that are crumbling and even the occasional corpse.

Moreover, housing experts worry that online bidders looking for a quick profit are precisely the kind of speculators that the troubled market doesn't need.

"When you make it easier and easier for people to gamble, you are going to have a tremendous number of people who think they have the smarts to do this and they are going to get nailed," said Ward Hanigan, the owner of Innovest Resource Management in San Diego, who buys foreclosed homes and trains bidders.

RealAuction, the company handling the Duval County sales, and its competitors hope to take the Internet model nationwide, including states like California with a large inventory of foreclosed homes. Right now, most of the properties sold online across the country already have been through public auctions and, unable to find buyers, have been taken over by their lenders.

"I would have to be fundamentally persuaded that it wouldn't compound existing problems in the housing market," said state Sen. Mark Ridley-Thomas (D-Los Angeles), chairman of the Business and Professions Committee and author of new legislation to help people refinance subprime loans.

U.S. foreclosure auctions date back to the 19th century and were created in the same spirit as public trials, to make sure that homeowners' rights were not violated by unscrupulous lenders in secret.

In most states, either a court, a county agency or a trustee runs the public sale before the property can be taken over by a lender. In California, private trustee firms appointed by title companies hold the auctions while recording every step of the process with the county clerk.

"With a public auction, if there is some chicanery going on between the trustee and lender, that won't be hidden," said Grant Nelson, a law professor at Pepperdine University who has written extensively about the auction process. "And if there are bidders who are colluding, that will be obvious too."

Some counties have sales every day. Usually a small group of regulars shows up after researching the properties and figuring out, often by paying a title company, whether there are any outstanding claims on the property, multiple mortgages, for example, or a divorce case that has tied things up. They typically bring a cashier's check for the maximum they are willing to pay that day.

The auctions move quickly. Dozens of homes can be auctioned in less than an hour. The auctioneer announces a property, and bidders shout out their bids, raising them in $100 increments. If they win, they have to pay the entire sales price, often within the next few minutes. That usually means signing over that cashier's check and collecting any change.

The old way: a shout out and a check

And if no one bids enough to satisfy the lender, the property ends up owned by the bank. There's a reason for the old-world way of doing things. First, the intensity of the fast-paced, in-person auction quickly weeds out amateurs. Bidders have to research the properties' histories, understand the local market and actually visit the homes.

Online auctions could create a new class of investor, seduced by the volume of information online but unaware of classic pitfalls, like the risk that the property has other claims on its title or abuts a toxic waste dump.

"There are things about the title that you just can't find on the Internet," said Bruce Norris, CEO of the Norris Group, a real estate investment firm in Riverside. "They can't tell you whether you're buying a first mortgage or a second mortgage. If you're buying a second, then you don't own the home free and clear."

Even experienced bidders can trip.

John Jepson, a longtime bidder in Michigan, bought a house recently that he could only see from the outside because it had been locked up by the bank. He was assured by a neighbor, the son of the former owner, that everything on the inside was shipshape.

"After I won it at the auction, I got inside and saw that it had been destroyed. There was water damage. The roof was leaking. Pipes had been pulled out of the walls. I had to spend about $40,000 to fix everything."

John Kern in Jacksonville, Fla., had a different kind of surprise when he cracked the door of a home he had won at auction.

"There was a dead body inside," Kern said. "You can imagine what I had to go through that day with the homicide detectives."

Hanigan at Innovest Resource Management said most people are overwhelmed by the amount of work involved and that creating a simple online interface will give people the courage to take dangerous financial risks.

"People are going to be bidding on properties they have never seen," Hanigan said. "What are they going to do? Go to Google Street View?"

That's exactly what they're going to do. RealAuction provides a link to the Google service that allows viewers to see recent snapshots of an address and then see properties up and down the same street. It also provides links to county tax records, sales records and zillow.com pricing information.

"We don't do the homework for people, but we provide them with links to all kinds of information to make the homework a lot easier," said Lloyd McClendon, RealAuction's chief executive.

One model for how online bidders might act can be found in RealAuction's core business: back taxes.

In Arizona, RealAuction allows bids for people's unpaid property taxes. If you win, you pay the taxes. The person who owns the property has to pay you back, usually with interest. If they don't, you can claim ownership of their property.

When Arizona used in-person auctions, the local bidders knew what properties to avoid. There is a cluster of homes in the northern part of Yavapai County, for example, that has no access to water.

"The local guys avoided those properties. We couldn't sell them," said Ross Jacobs, the Yavapai County Treasurer in Prescott.

"Now we get bids on everything."

Arizona, one of the states hardest hit by the foreclosure crisis, is a prime market for RealAuction and other online companies.

Lobbying to change California law

No market, however, is bigger than California. The state has seen about a 250% increase in foreclosure auctions in the past year, according to MDA DataQuick. More than 26,000 homes were put up for sale at auction in July.

Those figures don't include the private auctions of homes that have been bought by banks. Many of those already are sold online by companies like RealtyBid.com, Bid4Assets Inc. and Zetabid, which is owned by Tribune Co., the parent of the Los Angeles Times.

Some of those companies are hoping RealAuction and its lobbying firm, Akerman Senterfitt, which has offices in Los Angeles, will pave the way for changes in California law. The pair say they are working on it.

But before they will be allowed to conduct public auctions of California real estate online, proponents may face opposition from the trustees who run the sales as well as skeptical lawmakers.

"I've been watching this happen in other areas, and I think that very soon now we are going to have a very enterprising lobbyist saying that this is exactly what the market needs right now," said state Sen. Michael Machado (D-Linden). Machado, chairman of the Committee on Banking, Finance and Insurance, is leaning against online auctions.

RealAuction went through a similar process two years ago in Florida, hiring Akerman Senterfitt to craft -- and push -- legislation there to allow the online auctions.

They pitched it as a "twofer," said lobbyist Larry Williams.

"You can save public dollars by cutting down on the amount of work and time these auctions take, and you're doing it without jeopardizing anyone's property," Williams said.

The company's efforts paid off this year, and Florida Gov. Charlie Crist signed a law allowing counties to run their auctions online.

Bidders will now have 30 days prior to the auction to go through various public documents linked to the RealAuction site. They will be able to put a 5% deposit into a Real- Auction account, then place bids before the day of the auction. If they win, they have to wire the rest of the money to the auction company by day's end.

"This opens up the pool of bidders, which will raise prices and increase the number of houses sold," said RealAuction's McClendon.

"Before, the auctions were controlled by a small group of professional bidders, and the auctions could be over in a matter of minutes. Now you can be on your boat and place a bid 30 days in advance."

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william.heisel@latimes.com

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