Can You Get A Good Deal At Auction?

Real Estate Auction Florida
I’ve been asked several times recently about homes on Zillow or Realtor.com that actually turned out to be homes up for auction. In each case the homes have been in obvious states of disrepair, but were listed well below the After Repair Value for homes in those neighborhoods. The potential buyers each asked if they should bid on them in auction.

On the face of it, we were seeing good value. It has been difficult for these last 12 months to find fixers on the open market that have any equity in them once the repairs have been done, so these really stood out. Should my clients bid?

Right now auctions are primarily used for 2 purposes. Firstly, auctions are a part of the foreclosure process, where a lien holder will satisfy their lien from the proceeds of an auction performed by the County Courts and either the lien holder or a third party will end up owning the property. Secondly, auctions are used by owners to sell distressed inventory – often lenders who took possession of a home through foreclosure will try to sell at auction.

Pinellas and Hillsborough Counties run auctions almost daily where foreclosures are sold to the highest bidder. They publish a calendar of properties to be sold on a given day along with the the judgement amount, the plaintiff and sometimes the plaintiff max bid. With just 5% of your maximum bid amount held by the County you can bid on any property from the comfort of your living room when that auction begins. If you win the auction, you have til 11am next day to deposit the balance with the County Court or you lose your 5% – if you pay the balance in time, then you own the property. Looking at the results for the last few days, the plaintiff has won the property in around 50% of cases.

What do you actually get when you purchase a home in the county auction? The site clearly states the county does not guarantee clear title – “title issued by the clerk after a judicial sale is not warranted to be free of any potential claims”. The foreclosure process is supposed to take care of any inferior liens, but there could still be issues with the title – title disputes in progress, new liens filed, city claims on the property for violations. The process also makes no guarantee that prior work on the home was permitted, that usage complies with zoning, or that the systems work or structures are sound. Additionally, the process does not allow for evicting current residents.

There are a lot of factors that could have a major negative impact on your real estate investment from title issues, to unseen repairs to having to evict current residents. So what can you do to minimize the risk? In the case of county auctions, there really is not a lot of diligence you can do on the systems and the structure, other than looking at it from the outside and talking to neighbors – going on site is trespassing. From a drive by, you can usually tell if someone is living there – you can’t do anything about it but at least you know you will have the expense of offering them ‘cash for keys’ or going through the Sheriff process of evicting them. You can also do diligence on the title and what will be cleared by the foreclosure – I recommend you have a lawyer or title company perform the search for you. As part of this process you’ll be able to determine what you’ll need to do to have a saleable title, and adjust your financial model accordingly.

Keep in mind that Homeowner Associations and Condo Associations can foreclose on a property when dues have not been paid – often these will be for small amounts, sometimes as low as $5,000. In these cases, the primary lien holder will not be removed – so you could buy a property for a fraction of what it’s worth, but will ultimately lose it when the primarily lien holder comes looking for what’s owed.

There’s a lot of diligence to be done before bidding on a property in the county auctions and there’ll be some fees for professional help. Some won’t work out, but the time spent will be good experience and the cost may be written off as a business expense. For those that do work out, with some hard work, you could own a property for well below market price. I’ve met a lot of people who have done well at county auctions, but very few people who do well consistently – most cut corners on diligence and end up getting burned by unforeseen costs. If you want to buy at the foreclosure auctions, put the work in, you’ll be grateful you did!.

I wrote this article in response to clients asking about homes that were not in the county auction, but were showing up on Zillow and Realtor.com as for sale at great prices, so what about these?

Once a lien holder forecloses on a home and takes ownership, they will typically want to resell it for the maximum amount. They really have two choices, sell it on the open market via a broker and the MLS or auction it.

Auctioning is an attractive way of disposing of real estate – fees are minimal for the seller, mostly being pushed to the buyer, they can sell it without evicting the current resident, they don’t have to do any repairs, they don’t have to do anything to address encumbrances on title and they can get the top market price for that home in its current condition. The reasons why a seller chooses an auction are the same reasons why any potential buyer needs to do diligence before bidding – this is the same as in the county auctions. The seller does not offer clean title or any warranty on the structure or systems.

There are a few key differences to the county auctions that a buyer needs to be aware of.

Firstly, that great price you saw on Realtor.com may be the starting bid of the auction but may not be the reserve price. Reserve price is the lowest price at which the seller will consider selling. It looks like a great buy, and it made you look. . . but may not be anywhere close to what the seller actually wants for the property.

Secondly, there will be a buyer’s premium and possibly other fees that the buyer will need to pay on top of the purchase price. Buyer’s premium is typically 5% of the final price – if you win an auction at $150,000, it will actually cost and additional $7,500.

Thirdly, the highest bidder may not necessarily be able to buy the home at the highest bid plus fees. Some sellers at online auctions reserve the right to counter bid or negotiate with the highest bidder and may not be bound to sell at the highest bid. This makes it especially difficult for a buyer when the reserve price is not visible, although some auctions do say when the reserve price is met.

Finally, with many of the homes in these types of auctions it is possible to schedule a viewing with a Realtor which will help with diligence on systems and structure.

If you want to bid on commercial auction sites, then do your diligence on the building itself as well as the title, be prepared for all the costs and build a financial model that accounts for all the possible pitfalls. . . and remember, if something looks too good to be true then it usually is.

As ever if you are looking to buy or sell real estate in St Petersburg, Seminole, Largo, Tierra Verde, St Pete Beach, Treasure Island, Madeira Beach or anywhere in Pinellas County then contact me or call/text me on 727.401.5997.