Bank Foreclosure Sales: Differences and Risks between Auction and REO-sales

Hi Everyone!

A new client of mind found a home on Realtytrac.com the other day and emailed me to get more information and see if I could represent him. For those who don't know Realtytrac.com is not a listing portal, it is an information and public records database (that is somewhat deceptively presented as a homes listing website). Most of the homes on Realtytrac are not actual listings, but rather bank notices for Auctions. Traditional brokers do not work with Auctions because there is (1) too much liability, (2) No ways to protect clients with inspection and loan contingency periods, and (3) Auctions are not commissionable.

Below I will explain the difference between Auctions and the normal REO-foreclosure sales that we as realtors work with.

-Jerry
310-228-8856

What is RealtyTrac.com and how is it different than other Websites (i.e. Trulia, Zillow, etc)?

RealtyTrac is not a listing source. Rather, it is an informational database that lists public information about properties. Homes found on Realtytrac are not posted by the seller or the seller’s agent, but rather they are posted by realtytrac the moment the home goes in default. In that sense, it is very informative. However, just because a home is in default doesn't mean it is for sale. It does often mean that there is an auction scheduled. At this point it is important for me to explain the distinction between "auction" and "REOs (Real Estate Owned)". When realtors refer to foreclosures, they are referring to “REOs” which are different than “AUCTIONS”. REO homes are properties that have been officially taken back and are now owned by the bank. The bank has full legal right as the seller and will put all their properties for sale through the local MLS. I have FULL ACCESS to ALL THESE LISTINGS.

When RealtyTrac posts information about a home, it is an AUCTION. An auction means, the private owner still owns the home unto the day of the auction. The auction is most likely being scheduled by the bank without the private owner's consent (though legally, he likely must oblige) He can still get the property re-instated back up to this day. This happens quite often. For these properties, the extent I can help you is by pulling title and contact information. Because of liability, I’m not allowed to advise you beyond that.

The reason I warn people about spending too much time spinning there wheels about homes on Realtytrac is that the auction process is the most difficult and the most risky of all home purchases. You will compete with auction professionals in a very fast paced environment, and often you need all cash to purchase the homes.

Differences Between REO's and Auctions

In January, I discussed exactly what REO's (the ones realtors work with) are and how they are different than normal sales: http://newhomesla.blogspot.com/2009/01/buying-from-bank-vs-buying-from.html

Today, I wanted to explain the differences that make Auctions so much more risky that REO's. They are not the same. REO's are homes that have been bought back by the bank and the bank is now selling. AUCTIONS are homes that are still owned by the trustee (private party) who is in default, and the trustor(bank) is now auctioning it off.

Hypothetically speaking, if you decided you wanted to start pursuing AUCTIONS, a popular way to do this would be to join a membership with a public information database such as RealtyTrac.com. However, please note, that websites like RealtyTrac have a reputation for deceptive practices and if you do a google search on “RealtyTrac” or “RealtyTrac Scam”, you will find a lot of information about this.

Once you found a property with Notice of Trustee Sale that you were interested in, you would call the trustee number and reference the corresponding order number. Usually there will be an automated line that will tell you (a) the status of the property and (b) The date, time and location of the auction.

On the day of the auction, you must show up with 10% cashier’s check for your purchase price. Keep in mind, this is a live auction, so you must bring increments for every increased bid you will be making. Without a 10% cashier’s check you will not get the property. The bidding begins at the minimum reserve price. The auction will likely be filled with professional investors and saavy auctionees, so don't expect it to be a walk in the park. If that price is not met, the bank buys and takes ownership.

You must bring the remaining 90% of the funds within a timeframe set by the auctioners - usually between 10 to 30 days. There is no contingency. You don't close on time, you lose your deposit and the property. For this reason, it is very important that if you bid on an auction property, it probably best if you have the ability to pay all cash just in case.

You should be aware that Auctions are the RISKIEST of all types of foreclosure purchases. There are no real estate agents to advise clients, just saavy auction investors. You won’t get a title report, inspections, contingencies, or guarantees that the seller can actually sell, that they are not bankrupt, that there aren’t liens on the home, or that the owner hasn’t wrecked the home (which you probably haven’t had access to see).

I found this article online, and if you're more interested in learning about the risks involved with each kind of purchase, feel free to check it out: http://www.creonline.com/money-ideas/mm-056.html

Also, http://www.streetdirectory.com/travel_guide/64784/foreclosures/how_does_a_foreclosure_auction_work.html

I don’t want to discourage you from pursuing an auction, but the risks are worth understanding.