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How To Get To An Auction In 3 (Not So Easy) Steps

AuctionThis past weekend while sitting at a condo in Redmond, WA that is currently being auctioned off by a company called Auction.com, I met several people that stopped by to look at the property, and even spoke to a nice couple that intended to make a bid on the unit. One question that came up from a visitor was “How does a home get to the auction stage?”

Step 1: You Try (Unsuccessfully) To Sell Your Home

Most homes start out as what we in the business would call a “Standard or Fair Market” sale.  In the area in which I work and live, these properties comprise about 70% of the total market. The home is being sold at a price that is sufficient to pay off all of the underlying liens and sales expenses on the property and the owner is able to walk away with some money is his/her pocket.  Another scenario  that would fall into the category of a “Fair Market” sale would be where the sale price is insufficient to pay off the existing liens and expenses BUT the seller has enough personal funds to bring to closing which would pay off the remaining balances.

It is entirely possible for a seller to price a home appropriately, and have a sale that does not result in being considered a “Fair Market” sale. This would occur when the sales price is insufficient to pay off the existing liens and expenses AND the seller is unable to make up the deficiency out of his/her own personal funds.  If this is the case, then we have a “Short Sale”.

Step 2: Short Sale The Home

Attempting a Short Sale on your home is like being a teenager all over again.  You need permission to do anything and everything. When you want to go to a movie, you ask your dad if you can go and if he will drive you.  He says “talk to mom”.  She says “You need to finish your homework, clean your room, and empty the garbage first”. You complete these items and ask again.  She then says “Cook the dinner, wash the dishes, and feed the dog, and then come back and ask me again”.   After doing everything she asked, you realize that the movie started, and you did all these things for nothing.  Next time, you just sneak out of the house.

When you short sale your home, you have to provide the underlying lienholder(s) with reams of documentation that support your reasoning of why you want them to forgive some of the loan amount on your property.  For a flowchart of the short sale process, click HERE to read one of my prior posts.  It’s a bit “tongue-in-cheek”, but realistically portrays the process that so many homeowners have experienced.

Something important to acknowledge here is that homeowners who attempt a short sale on their home are often already in financial distress, and this is their last attempt before losing their home to foreclosure.  Approximately 20% of the homes in my market area are listed as short sales.  I’ve personally worked with a seller client who completed a short sale, but it took nearly one year from start to finish.  If you are in financial distress, I urge you to start this process sooner rather than later. If a seller is unsuccessful at a Short Sale, then the next step is foreclosure.

Step 3: REO

If you are looking at properties and come across words or phrases such as Fannie Mae, Freddie Mac or Homepath financing, chances are you are looking at institutionally (bank) owned properties.  REO (Real Estate Owned) properties have often been taken back via foreclosure proceedings or in lieu of. Approximately 10% of the homes in my market area are bank owned.   As a buyer, you would treat this as any other home on the market except that instead of dealing with a potentially emotional homeowner, you instead deal with an emotionally detached institution.  REO properties are generally the best priced homes in the market in terms of actual $/sqft, but you have to factor in the condition of the property to determine if this is an actual bargain.  Banks are not in the business of owning real estate, so they are especially motivated to sell their growing inventory of homes.  In fact, some banks have procedures in place such as bi-weekly price reductions (to a point) just to get the properties sold.  If an institution is unable to sell the property through traditional real estate channels, they end up selling at auction.

The Island Of Misfit Toys

Only a very small percentage of homes actually get auctioned off.  Most are sold via traditional real estate channels.  Auction sales can occur on the steps of the courthouse (which often happens before the bank or other institution takes the property into its inventory in step 3 above, sort of a step 2a), or after they have taken possession of the property and have been unsuccessful in selling via traditional channels.  Because courthouse auctions can sometimes involve properties where the occupants are still living in them, they are a bit more adversarial.  If I had to categorize the differences between auctions, I’d say that the courthouse auctions are targeted to more experienced investors, while the website auctions such as auction.com and Hudson & Marshall (and many others) are better publicized and geared more towards less experienced investors and buyers.  But, just like those misfit toys, There Is A Home For Every Buyer And A Buyer For Every Home.

Have you purchased a home at auction? What was your experience like? Leave a comment and let us know!

When REALiTY BiTES, bite back!

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