With historic Maryland mansions being sent to auction like old furniture – the Stemmer House, Mensana House and Cliffeholme estates all in recent memory – it seems anyone with an eye for a house and a nose for a bargain might be tempted to start waving a paddle. And it’s not just high-end real estate that’s been affected. No one could miss the signs cropping up all over Baltimore. Absolute Auction. Foreclosure Sale. To Be Sold At Auction. Driving slowly by, you can’t help wondering how much that house would bring at auction and whether, if the price were low enough, you could make some money on it yourself. (Cut to vision of the fam lined up in front of Cliffholme for Christmas card photo.) Well, you might — and you might not. The process is not hard, but you need to do your homework.
I started by talking to Dan Billig, of the long established Baltimore auction firm A.J. Billig. Mr. Billig’s grandfather founded the firm in 1918, and he now runs it along with his father, brother and son. In typical upfront Baltimore style, Dan reminds me that “our client is the seller, not the buyer. We work with the buyer to facilitate the deal, but our responsibility is first, to the seller. That said, we’re straight shooters, and we’re not going to mislead anyone.”
Ok, fair enough, but is there really money to be made here? What about all those nutty (but irresistible) advertorials like “How I Became a Millionaire –With Little or No Money Down?” None of us wants to lose money, let alone get outright taken in the process. Dan confesses to “being a big fan of A&E and HGTV” — network homes to the popular shows Flip This House and House Hunters — but also promises that “there really are tremendous opportunities out there.” The fact that currently, a third of American home sales are houses bought at foreclosure (six times the rate of foreclosure sales in a healthy market) seems to indicate that he’s right.
If you’re serious about this, you may already be checking out auction properties — on the A.J. Billig website for local real estate, or Auctionzip.com and RealtyTrac.com for real estate nationwide. Public foreclosure auctions of bank-held real estate, sometimes called Trustee’s Sales, are the most transparent, least complicated type of real estate auction, and that’s what this article is about. Tax auctions or short sales are better left to buyers with real expertise or professional advice. That said, getting a realtor who’s knowledgeable about foreclosures can be a plus in any situation.
If you’re only half serious, and you’ve simply just spotted an interesting property, what’s the first step? “Call the auctioneer,” says Billig. The name will be on the sign or in the ad. He points out that Billig now offers QRC or “quick response code” — basically a bar code on the sign itself that you can scan with your cell phone and get right to the web page to get information on the property.
OK, Step 1, call the auction house to get the date and location of the auction, terms of sale, and a time to view the property. AUCTION SALES ARE “AS IS.” You need to get in there with a contractor to look around and see where the problems are. Almost always, it’s roof, plumbing, heat and AC. This part needs to happen fast, three weeks is probably the maximum, a few days is common. It would be great to have a contractor on-call, and a lot of them are not too busy these days. Now, get online and start researching the neighborhood — the average house price, the quality of the local schools, the rental market and the property taxes. Be sure to drive by the property again, to get a further idea of the neighborhood. There’s always the chance of a casual meeting with the owner (and possible last-minute deal before auction) or neighbor (with some insider information to help your bidding decisions). Take pictures and notes, but be discreet, as the owner may still be living in the home!
Once you’ve lined up a viewing and done your research, know that if you place a bid and win, you will be required to put down roughly 10% in cash or cashier’s check immediately — like as soon as the gavel goes down. The rest needs to be paid by a specified date, usually in about 30 days. If it’s not paid, you lose the deposit.
So Step 2, organize the financing. Unless you can pay the full amount in cash, in which case all you need to do is get a cashier’s check for roughly 10% of what you plan to bid, you’ll need financing. This needs to be worked out ahead of time with your bank, because especially now, you can’t assume the credit will be there, and unless you are deemed totally credit-worthy, banks are more reluctant to lend money to buy a house in foreclosure. One reason for this is that auction deposits are not refundable, should something go wrong.
Step 3, — and everyone agrees on this — get a title search. While Billig guarantees that there are no hidden liens on their houses — in other words, no money owed by the owners that the new buyer will be obligated to pay — you still need the advantage of a title search. Betsy Jiranek, a Baltimore title agent whose company, American Land Title Corporation specializes in title searches, explains it this way, “we make sure you are getting the title ‘free and clear of all liens and encumbrances.’ We search land records, tax records and house history, looking for bankruptcies, wills, anything that could endanger the free passing of the deed.” This is public information, she reminds me, but most people are not comfortable researching and interpreting all the documentation that’s out there. Normally, a title search takes a week, she says, “but in a pinch we can turn it around in a day.”
Step 4, get title insurance. “Ninety-nine times out of a hundred, everything is fine,” says Jiranek, “but title insurance is for that last one percent.” In the words of Dan Billig, “ I would absolutely get it (title insurance). It’s so cheap, you’d be foolish not to.”
Step 5, determine your bid amount. Unless there is a minimum bid requirement, a safe bet is at least 20% below market value, and as far below that as you think you can go, considering local real estate conditions and the properties potential for increasing in value with repairs and improvements. You’ll want to gather the following information:
- Outstanding balance on the mortgage
- Estimated market value
- Other liens and loans the owner may have taken out
- History of ownership (if it was owned by a contractor or corporation, it maybe less of a bargain than a distressed homeowner)
- Your monthly expenses as the owner of the house – mortgage payment, taxes, insurance, repairs, etc
Standard advice suggests that you subtract all your costs as a buyer (mortgage balance, additional liens, repair work) from the estimated market value of the property, and use that number as the basis for your bid. A note of warning here: WATCH OUT FOR HIDDEN COSTS.
Many, but not all, foreclosure sales will add a 5% to 10% “buyer’s premium,” basically the auctioneer’s fee. Also, you might have to pay interest (daily) on the unpaid balance of the sale price. And typically, the buyer pays the closing costs (not the seller, as is usual in a non-foreclosure sale). Obviously, these items can add a lot to the total price, but many of them are negotiable. Go back to Step 1, and talk about ‘terms of sale’ with the auction house.
NB. Be prepared for cancellations. Incredible as it seems, over half of all foreclosure auctions are cancelled for one reason or another. Often they are postponed with no new date specified. If you can, plan on attending an auction ahead of time as an observer, just to see how it works. This will pay off in terms of confidence and know-how on the big day. It’s fascinating in a way, and good people-watching at a minimum.
Finally the day comes. You’re at the auction, armed with your cashier’s check for 10%, your financing, your title insurance and your trusted contractor’s estimates for the work needed. Step 6. You’re ready to bid. You’ll want to:
- Arrive early and locate the auctioneer
- Don’t expect the other bidders to be friendly, and don’t let this intimidate you. On the other hand be open to information and pick up any cues you can.
- Dress like a banker. Other bidders may assume you are one and back down from a bidding war.
- If several bidders are battling it out, wait until the bidding dies down before making yours.
- Set a firm ceiling for your bid. Avoid getting auction fever and overbidding, which can result in little or no bargain for you.
Finally, be realistic. Twenty-five percent savings is what you should expect from buying a house at auction. Sure, there’s the woman who bought a house in South Hampton for $45,000 and it’s now worth $1.6 million, but that probably won’t be you. The sanest approach comes from a professional. Betsy Jiranek, who sees a lot of potential buyers, offers this advice “really, I tell clients, ‘don’t get emotional — there will always be another house.’”