Real Estate Opportunities: The Real Estate Auction

Beginning in the early 1990s the real estate auction began it's surge as a means to relieve developers of excess inventories of property with accompanying expenses and allow buyers to pick up valuable property at discount prices. The key for buyers is knowledge of the true value of property up for auction and the ability to seize the opportunities created by the auction. In addition, all real estate auctions are not equal.

The buyer or seller of the property needs to evaluate the success and failures of the auction company. Specifically, the parties to an auction should be aware of the covenants and restrictions on the property, state and local taxes and lending restrictions. The sellers should be cognizant of the costs and fees associated with an auction. The buyers should be aware of any costs involved in transferring title and other fees.

A reason for auctions come into being when a development has reached a point of diminishing results for a developer. In effect the developer has expended large sums of capital to provide graded roads for access to and from the property. Other improvements include grading the lots and providing basic services like water, sewer, electricity and gas.

For a variety of reasons some developments do not completely sell out. Seller's incentives have not worked and expert marketing and sales staff have not been able to move the property. As the years go on a developer/seller will find a financial squeeze. Lenders are reluctant to refinance at attractive rates on improved lots of land and the taxes, liability insurance and maintenance expenses can be overwhelming. Sometimes the real estate auction is the only course available short of bankruptcy.

In a real estate auction I provided administrative assistance in early 2000. The developer had utilized every option available for selling the property and found the real estate auction as a means to an end. See the following tips.

Seller/Developer:

1. In considering an auction company have the prospective auction company provided you with a list of past auctions. In addition get a list of contacts including phone numbers and addresses of previous sellers that the auction company has done business. Contact the sellers and ask for a detailed explanation of their experience with the auctions company. Find out if the auction company did what it said it would do. Find out if the auction company provided good service. Most importantly, find out if the initial costs estimated by the auction company and the resultant sales was accurate.

2. In final agreements with the auction company, always get an estimate in writing of the costs associated with the auction. Have the auction company provide in writing a time table for completion of their marketing and the costs you will be advancing. In these auctions the seller always advances fees and costs, rarely do you find an auction company that works on a percentage of final sales. The auction company will probably have you provide all the costs and expenses up front and at the end of the auction take a percentage of the final sales. As a seller you need to know about all of this prior to entering into an agreement.

3. A seller needs to step back and look at the development as objectively as possible. In order to entice buyers a number of parcels of property may be sold for a fraction of the original asking price. While the auction company is free to sell the parcels pre-auction at reduced rates there still needs to be some "No Reserve" auction parcels available for the day of the assigned auction. In the auction business, the "No Reserve," means you cannot set a limit on the price.

You can however, set a limit on the number of certified buyers attending the auction. You do not want five people showing up as bidders who made collude to drive down the price of the lots. You want at least 30 to 50 buyers at a small land auction or you can reserve the right not to hold the auction. For larger developments the figure may be higher.

4. As a seller you want an attorney or a real estate expert to review any and all contracts you are considering with a real estate auction company.

A Buyer:

1. As a buyer in a real estate auction you will be asked to bring a certified bank check to the auction. The amount of the check is dependent on the will of the auction company. Generally, it is between $2,000 to $10,000. The bank check is on one hand a means of weeding out the curious from the serious. In addition, it shows good faith and credit worthiness. You are not required to bid on any property at the auction.

Generally, a reputable auction company will make prior arrangements with a local bank for financing the balance of the auction price. If you have your own financing, so much the better. Some banks require you to build on your developed lot within several years. Interest rates are generally higher for lots.

2. Know the property. You must exercise due diligence in your research of the property. Know the covenants and restrictions. Know the value of the property in the area. Know the tax structure of the area. Know the exact description of the property as stated in the Clerk and Recorder's office of the county where the property exists. Make sure there are no liens on the property. Require the developer and auction company to provide you with a recent title report and provide in writing there are no liens or other interests on the property.

3. Talk to real estate agents in the area and find out about the property you are considering. Talk to a lawyer about the property if you have any concerns whatsoever. Speak to a real estate escrow officer in your bank and find out their opinion on the property.

4. Lastly, if it is too good to be true, it probably is too good to be true.