- The Washington Times - Friday, May 8, 2009

Auctions are not for amateurs. While the fantasy of buying a home for a discount price may sometimes be reality, auction buyers need to have extensive knowledge of their local market to recognize bargains. Solid preparation for buyers includes not only market knowledge, but also understanding all the details and rules of the auction and being financially equipped to make a purchase.

Buyers need to know exactly how much they are willing to pay for a property and make sure they do not exceed that limit.

“It’s an interesting contradiction that the public perception of auctions is that you can buy a home at a rock-bottom price but the greatest fear is that you will overspend,” says Elsa Lewis, senior vice president of national sales for Williams & Williams Real Estate Auctions, a Tulsa, Okla.-based company that conducts auctions in the Washington area. “That’s the point of being prepared so that you know you will bid only as much as you think a property is worth.”

Ms. Lewis says that her company’s surveys show that buyers find auctions more transparent than the traditional home buying process, since everyone knows who the competition is for a property and there is a set day and time that the property will be sold.

“Buyers these days are concerned about purchasing a home at a fair price,” says Ms. Lewis. “At an auction, no price is established at all, and the fair market value is what a buyer will pay and the seller accepts. Buyers will know immediately if they have the highest bid, and then the sellers sometimes take a week or so to decide if they will accept that offer.”

Robert Earl, a Realtor with Keller Williams Realty in Reston, says that auctions should come with the biggest “buyer beware” notice possible.

“Buyers are teased by ads that claim a property that was once valued at $550,000, then was on the market for $450,000, is now available at an auction with a starting bid of $75,000,” says Mr. Earl. “But buyers need to read the fine print and understand that they will also have to pay commission fees and closing costs.”

Christine Shevock, a Realtor and certified auction specialist with RE/MAX Allegiance in Rockville, says that inexperienced buyers should avoid auctions.

“Auction buyers need to know the market and be well-educated on the auction process,” says Ms. Shevock. “For some buyers, an auction can allow them to buy a home at a bargain price, especially if they are knowledgeable about the market and are conservative in their bidding. But sometimes people get emotionally charged by the auction atmosphere and make a bid, which is too large, out of excitement.”

Ms. Shevock also stresses that, unlike a standard transaction, buyers will be responsible for paying a commission to the auction company. The commission or buyer’s premium will either be a flat fee or a percentage of the sale and will be disclosed in the auction documents for individual properties on the auction Web site and disclosed verbally during the actual auction.

Rules for auctions vary by company and by property owner. Government-owned properties are typically auctioned at the local courthouse, while banks or individual sellers who opt for selling properties through the auction process will work with auction companies. Buyers can bring a real estate agent with them to the auction and consult with the agent prior to the auction for professional advice on the sale, but the actual bidding must be done by the buyer.

“Being rushed is never a good thing when it comes to buying a home,” says Mr. Earl. “At an auction, buyers will have to make a bid quickly, then rush through the paperwork on the spot and settle within 30 days. Buyers should ask themselves why the property is available at an auction. If it was priced properly and in good condition, then it would have sold.”

All properties up for auction are sold “as is,” meaning that buyers must accept the condition of the house without requesting repairs. Yet, rules vary on inspections.

Ms. Shevock says that government-owned properties can sometimes be inspected, but not always. Most auction companies arrange for their properties to be open for inspection one or more days prior to the auction, and potential buyers can request an appointment with a Realtor and/or a home inspector.

Paul Cooper, vice president of Alex Cooper Auctions in the District, says that the most important advice he has for buyers is to “do your homework.”

“Buyers need to do a home inspection before the auction sale date so they know what they are buying,” says Mr. Cooper.

Mr. Earl says that while buyers should inspect the property before they make a bid, sometimes the homes do not have the utilities turned on, so it can be hard to find out what works and what doesn’t.

Ms. Lewis says that when a home at an auction is a foreclosure, the lender (having not lived in the house) won’t be able to disclose things that need repair.

“It’s up to the buyers to do the due diligence, to research the property through Web sites such as zillow.com or trulia.com and even to look at the sales history at the courthouse or land records office,” says Ms. Lewis. “Every property on our Web site has as much information as we can provide, and we have links to community information and analytic tools that can help estimate monthly payments. Open houses are listed on the site and held for a week or more prior to the auction date.”

Ms. Lewis says prospective buyers can also bring a certified home inspector or a real estate agent with them (by appointment) to inspect any property.

“Buyers need to understand that they are buying the property ‘as is,’ so the inspection is to provide them with as much knowledge as possible,” says Ms. Lewis.

After the research has been done, buyers need to prepare themselves financially.

“At an auction, nothing is negotiable. If they have the winning bid, their earnest money deposit will be cashed and they need to close on the property within 30 days. So buyers need to be ready with either cash or a loan preapproval,” says Mr. Cooper.

Mr. Cooper says that buyers need to be prepared to pay all commissions and closing costs. He says that these combined fees could be 7 or 8 percent of the sale price of the home. Ms. Lewis says that fees at her company’s auctions are generally 5 percent or a flat fee of $2,500 to $3,000 on bank-owned properties. Closing costs are additional.

“Deposits at auctions are typically higher than in a regular transaction, so buyers need to be ready with that deposit on the auction date,” says Mr. Cooper. “The deposit is usually about 5 to 10 percent of the sales price of the property. Buyers need to be aware that they can lose their deposit if they cannot arrange financing within the required 30 days. That is why it is so important that they have been preapproved for a loan.”

Ms. Lewis says most of the Williams and Williams auctions are listed online 20 to 30 days before the auction, allowing time for potential buyers to obtain financing and gather cash in an accessible account.

While most auctions are selling bank-owned properties, some private home sellers opt for an auction, usually because they are in a hurry to sell their home.

“Sellers like the fact that there is a definite time and date that their home will sell, as opposed to the uncertainty of the traditional real estate process,” says Ms. Lewis. “It is very rare not to have at least one bid at an auction, although there are times when the seller won’t accept a bid because it is too low.”

Williams and Williams auctions are sometimes listed as “with reserve,” which means that the highest bid is subject to the seller’s approval before final acceptance.

Mr. Earl says that while sellers believe that selling at an auction can bring them more exposure, he believes that homes that are priced correctly, are in good condition and marketed aggressively can sell for a higher price in a traditional transaction.

“The psychology of an auction is appealing to sellers, who like the idea of an end date and of getting potential buyers off the fence,” says Ms. Shevock. “Sometimes the sellers can get more for their property this way, but just as often they are disappointed in the bids and choose to put their home back on the market.”

Mr. Cooper says that many of the homes his company auctions actually sell prior to the auction.

“We take a two-pronged approach, listing a property and then designating an auction date and time. We work very hard to calculate a fair price for a property and then set an auction date, which gives buyers a sense of urgency,” says Mr. Cooper. “We advertise that pre-auction offers are strongly encouraged, which sometimes results in multiple offers. For buyers, it makes sense to make an offer prior to the auction, because then they can make the contract contingent on an inspection and financing. If they wait until the auction, no contingencies are possible. Sellers win either way, as long as their home is sold.”

Whether buying or selling, auction participants need to be sure they understand the fine points of the auction process by carefully reading all materials and preparing themselves with knowledge about the market, the individual property and the financial requirements of this method of transferring homeownership.

Here are some auction tips for buyers:

• Be thoroughly prepared with information about the home you want to buy: know the neighborhood, the market and estimated value of the property.

• Be prequalified with financing before registering for the auction. The highest bidder will be required to close on the property within 30 to 45 days of the auction.

• Be prepared to pay a substantial deposit at the auction in certified funds, which may not be refundable even if you cannot obtain financing.

• Review all materials on the auction Web site so that you understand all the rules and requirements and have studied all the available information on the property.

• Preview the property prior to the auction, preferably with a home inspector.

• Make sure you know your spending limit. If you have a predetermined idea of the value of the property, then you should find it easier to avoid overpaying for it.

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