Real Estate Auction?

Question

Hoping some of you that know more about real estate then I do can give me an idea what is going on, with this:

The situation is: In the newspaper, there is a company that sold two houses tonight at auction. I attended one, the house appraised for $550k, I walked through it and that seems about right, approx. 6k square feet, nice details, needs a little work. The auction was at the home bidding started at $311k. The guy that won the auction won it at 380k. I wasn't willing to bid because I don't know these guys, and how this company is pulling this off. I talked to another guy he said the house was up on the market for $500, sold for 460k a month or so ago. So how does this company buy houses then lose on the auction. The catch you have to finance with them (seller carry) for at least 5 years. The interest rates where 20k down, 14%, if you put down 100k you receive 6%, fixed on the balance for 30 years fixed. Am I missing something. Please ask questions? Thoughts?

Yes, I understand that 14% interest is very high, but you are only putting up 20k of your own money. If you put down, 100k down, the interest rate is 6%, on a 30 year fixed payment schedule. Isn't this competitive with current 30 year mortgages? What I see, is the difference between appraised 550k and purchase 380k, that is equity of 170k that you have gained in this purchase.

I think that I am going to have to try and get a hold of the sales contract that you sign to if you win an auction.

Since this auction is seller financed for a period of at least 5 years. Does this mean that the seller still stays on title or the deed since they are still owed the payments to the house? So, in a sense you are co-owners with the sellers until you have the home paid off? Is it also possible that these investors if they are still on title, can place leans on your home. If the company was to make bad investment decisions, and creditors were do money couldn't they come after your home?

Answer 1

What you describe is a “wrap-around” mortgage. The seller, acting as your bank, collects your 14% payment. He then makes the payment on the underlying Note which probably has an adjustable low-interest or fixed-for-5-years low interest rate. I say this because he needs you on the hook for 5 years for this arrangement to work. He then takes the difference between your 14% payment and his much cheaper payment and pockets the difference. If what your friends say is true and he paid $460,000 and he put a substantial down payment when he purchased it, then the difference is even bigger; that is neither here nor there and really has nothing to do with whether or not this is a good deal for you. There is nothing illegal about a transaction such as this as long as the seller and his “auctioneers” disclose everything about the underlying lien.This is how they make their living – interest income, usually off people who cannot qualify for a loan using conventional methods. It is a way to achieve home-ownership for many who have been turned down.



You need to enlist support when you sign the contract and make sure there are provisions that have a title insurance policy issued showing you as the sole owner and only the seller’s underlying loan plus your loan to hin as encumbrances. Talk to the title officer before closing to make sure that is true and there aren’t any taxes due. There should be provisions in your contract that have the seller give you a copy of and sign approval of, the executed Note to his bank. During the closing period, call the bank and verify the rate, terms, and conditions. I’m sure that your contract will have you responsible for any pre-payment penalties your seller incurs if you refinance before the 5 years is up.

In this type of contract, you are the sole owner; no one else can take loans out against the property. If you do this, you MUST insist on the services of a professional “private Note collector”. They take your payment, pay the underlying mortgage, and distribute the remaining balance to the seller. They issue you a 1098 and him a 1099 at year’s end for your taxes. Otherwise, you have no way of knowing for sure his mortgage is being paid and could end up in foreclosure even though you made your payments. I bought a For Sale By Owner who took back the Note. We found our service at Noteworld.com.

There are 2 things I don’t understand that raise suspicion. 1. Why call it an auction? I guess it is, in a non-traditional sense; they are looking for the highest bidder. If this is a scam, then the majority of the people showing up to bid are “shills” – part of the scam. 2. If your friends are right about the recent $460,000 purchase, yet you saw someone win the house with a $311,000 bid, then something is terribly wrong. Both of these facts cannot be true. Your friends may be wrong or you may have mis-interpreted the amount of the sale. Take the address to your local Clerk & Recorder, or what ever they call the Dept. that registers deeds and research the sale you saw and the previous sale and back taxes. If in doubt, walk. There is nothing that feels worse, with few exceptions, than being the object of a costly scam. Trust me, I know. You never really get over it. Scammers can use very sophisticated ways, involving many many people and have ways of doing a bait and switch at the last second, making you feel foolish or like someone whose word is no good if you start to pull back. Speak with local law enforcement, an attorney, get the name of the last town they operated in and ask law enforcement there.

Answer 2

I'm a licensed auctioneer, real estate agent and attorney - and specializing in selling real estate by auction. Our focus is on voluntary auctions, not the courthouse steps/foreclosure auctions.

That said, I'm unfamiliar with the seller financing terms you mention above. However, most professional real estate auctions share these basic similarities:
- all terms are set, except for price
- bidders are bidding on price alone, there are no other negotiables
- all terms/conditions are provided in advance of the auction
- bidders bid according to how much they value the property, given its condition and the terms of the sale.
- terms are as-is/where-is, no contingencies
- typically a 30 day closing is required
- High bidder/buyer puts into escrow a non-refundable deposit
- Clear title is typically the only guarantee
Note: auctions represent the opportunity for accelerated marketing of a property. Because it's a date driven sale, it creates a sense of urgency for buyers. The auction method puts the seller in the driver's seat.
- Auctions represent a VERY fair way to transact real estate, the process is transparent.
- Buyers will never overpay for a property because they know what's required to bid one higher increment then the prior bidder.
- Most auctions have a buyers premium that's an adder to the high bid. If the buyers premium for your example above was 10%, then $380k plus $38k would equal a sales price of $418k.
- Always beware of who you talk to at an auction. Many times 'spectators' have alterior motives to their own advantages.

Answer 3

At the auction high bidder wins unless there is a reserve minimum price. They arrange terms in advance for financing. In this case they were seller financing. That made up for any shortage in the sale price.

It is deemed that at an action the price paid is the highest and best price that the property will bring, so that is the value. The contract you sign is a typical real estate sale and buy contract.

The home is transferred to the new buyer with the seller holding a first place on a deed of trust in deed of trust states. Therefore you are not co-owners with the seller. If there is a missed payment the home is subject to foreclosure. This makes for a cleaner process in the even of default if payments. They foreclose and it wipes the slate clean, or the 2nd or later lender has to buy it to cover their debt.

Answer 4

14% Interest? They are making about $53,000 per year in interest, and the money is only costing hem about $19,000. That's $34,000 per year, pure profit, times 5 years is $170,000. Add that to $380,000, and you have a net of $550,000, plus all the write-offs that go with a sale on those terms, and if they guy can't keep up on the payments, they get the property back and they are going to make even more.

PT Barnum underestimated. Grievously.

Answer 5

yes, its pretty muxed ip!