Monday, March 31, 2008

Auction House Advice

(Update for "Heard It Through the Grapevine". Here is my reply on the SDCIA message board.)

I received this message from a friend today:

Hi Carol,

Here is the link for the home auction that I was telling you about on Saturday. I would like to get your thoughts on this.

REDC (Real Estate Disposition Corporation)


This was my reply:

We've never been to an auction house event before. The only auction we attended was the one on the steps of the courthouse in San Diego when the market was rising rapidly. You should go just to observe at first. The one aspect that you may want to pay special attention to is how much more than the starting bid do the houses sell for.

If you have any inclination to bid, you need to be very prepared, since there is no right to rescission. Here are just a few suggestions:

1) Visit the property beforehand and have it professionally inspected.

2) If repairs are needed, have a contractor give you an estimate and then add 50%, just to be safe.

3) Ensure that the title is free and clear.

4) Know what the rents are in that area by looking through the newspaper and calling about the houses with For Rent signs.

5) Find a good property manager before you get started.

6) Know your total monthly expenses, including, but not limited to the payment (principal, interest, property taxes, and insurance), HOA fee, gardener (if included), vacancy rate, repairs, and management fee (usually 9-10% of rents collected--lease up is one full month of rent).

7) Most importantly, know what the property is worth by independent research and don't bid a penny over--no matter what. This auction house offers a 1% coop to agents. You may want to hire a good one to go with you. They could look up the comps, review the title, and visit the property with you before the auction. My favorite agent in this area is Jeff Rose. Let me know if you'd like his number.

I've heard that these auctions sometimes hurt the small-time investor because they haven't done their homework and feel the property is worth more than it really is. Don't pay attention to the figures that the auction house gives you.

8) Ensure that you have your financing for the properties that you are interested in set up beforehand. Call the lender, give them the address(es) and go through the pre-approval process BEFORE you set foot at the auction. Then, once there, you can compare the auction house lender rates and fees with those that you garner on your own. However, if you notice on the FAQ page, it states that, if you use your own lender, there is no contingency on loan approval. So, they must make quite a bit of a kickback from the lenders present. Plus, they want to ensure that the properties close and they're not stuck with inventory.

9) Also, take notice that you will be paying 5% OVER the sale price of the property as a Buyer's Premium.

Since I haven't done this before, there may be myriad items that I am not considering. My list is merely a start. If I think of anything else, I'll let you know. When you go to the first auction to observe, talk to as many people as you can. The first question you ask is, "Have you done this before?"

If any of you have experience in this area, please help my friend out and post your suggestions.