SIDE NOTE FROM RUSS: I had a lot of people ask me about the public auctions and I thought this covered most of the points that can be a pitfall to most buyers.
by J. Craig Anderson - Dec. 7, 2008 12:00 AM
The Arizona Republic
See a 3,000-square-foot home, built in 2005, on the auction block with opening bid set at $50,000. Or a possible rental property, built in 1962, with an opening bid of $10,000.
It's enough to make your palms itch.
But before you raise your paddle, the auctioneer seems to be raising the price without any bids.
Or once you think you have a winning bid to score your bargain buy, the seller kills the deal.
Is this some kind of cheating? Not necessarily. But the auction process can be confusing, frustrating and disappointing to infrequent auction-goers who don't know the rules of the game.
The auction process itself is unregulated in Arizona, which means tactics designed to manipulate bidders - though frowned upon by most auctioneers - are not illegal.
Advocates both for the auction industry and for consumers say the best thing hopeful bidders can do is educate themselves about the way home auctions work before trying to participate.
"Don't let yourself get carried away at this sort of auction or in any high-pressure sales situation," said Anne Hilby, spokeswoman for the Arizona Attorney General's Office.
Pitfalls for bidders
Home auctions represent the fastest-growing segment of the Valley housing market, promising deep discounts to buyers and rapid-fire sales to lenders, home builders and other property owners desperate to reduce their inventory.
Auctions of varying sizes, from a handful of houses to hundreds, have sprung up, and industry insiders estimate that about 80 percent of prospective buyers attending are not frequent auction-goers.
The process can be tricky for the uninitiated.
Phoenix resident Jordan Rubenstein was looking to buy an affordable home for his young family, and a friend who had recently bought a bank-owned home at auction encouraged him to try it.
Rubenstein, 22, attended an auction held Nov. 16 in Mesa by Irvine, Calif.-based Real Estate Disposition Group, commonly referred to as REDC.
Before even showing up to place his bid, Rubenstein said he ran into a problem.
Two of the homes he chose from a list on REDC's Web site to inspect during a scheduled open house were locked when he arrived.
"You couldn't even go inside the house," he said.
Undeterred, Rubenstein settled on two of the auction's 500 advertised homes that he was able to inspect. He did some research to make an estimate of the fair market value for each.
Still, Rubenstein said his due diligence did not prepare him for the auction process itself.
"My experience was horrible," he said.
Rubenstein said he attended the event with his father, and right away they both began to notice the auctioneer was raising the bid on some homes when no one in the audience appeared to be bidding.
Even though the starting bids on most homes were extremely low, Rubenstein had learned that in order to actually buy a home, the bidder would have to reach a certain, undisclosed price set by the seller, called a "reserve price."
In the end, he said, there were some bargains to be had, particularly on homes priced below $150,000.
But winning bids on most homes in his price range of around $300,000 were barely below market value, Rubenstein said, once he factored in the 5 percent auctioneer's fee and what he estimated it would cost to fix damage from previous owners.
"I really didn't see any reason to bid on a home," he said. "On the positive side, it taught me the value of a real-estate agent."
Perception problem
REDC spokesman Rick Weinberg said Rubenstein's story does not reflect the typical auction experience.
Sellers are supposed to make sure a representative is present at each home to show the property during a scheduled open house, he said.
Still, Weinberg said, the auctioneer can only do so much to help sellers help themselves.
"We've heard the story - it's happened before," he said.
Weinberg took issue with Rubenstein's claim that the auctioneer pretended to accept bids on certain homes to raise the sale price, known in the industry as "ghost-bidding."
"He's totally wrong," Weinberg said. "It does not happen, and it will not happen."
Chris Longly, director of public affairs for the National Auctioneers Association, said ghost-bidding isn't illegal in Arizona.
Neither is a practice known as "shill-bidding," in which an agent of the seller poses as a bidder to drive up the price and foster a sense of competition among legitimate bidders.
The Arizona Department of Real Estate does require home-auction companies to obtain a real-estate license, but it does not dictate auction terms.
Still, Longly said he seriously doubted REDC, a large and well-known auction house, would allow either practice.
"If you get caught ghost-bidding or shill-bidding, you're not going to be in business very long," he said.
It's far more likely that the auctioneer was accepting phone-in bids, Longly said, or that Rubenstein simply didn't see the other bidders' cards being raised.
"These real-estate auctions, they move quick," he said.
New to the game
Most states have their own licensing processes for auctioneers that dictate to varying degrees the way auctions can be operated.
Arizona is one of 17 states that do not.
Hilby said the Attorney General's Office has not received many consumer complaints, but experts inside and outside the industry said the fast-growing home-auction business poses a unique set of public-relations challenges.
Unlike auctions offering cars, antiques, collectibles or artwork, home auctions are often attended by first-time bidders who are unfamiliar with the rules.
John McCann, president of Scottsdale-based National Real Estate Auction Corp., said undisclosed reserve prices are commonplace to anyone who attends auctions regularly.
"The reserve price is whatever the seller sets as the lowest acceptable price," he said. "The opening bid in some cases is lower than the reserve price."
While that may appear scandalous to the uninitiated, McCann said the purpose of an opening bid price is to let bidders know the general ballpark in which they're going to be playing.
Similarly, most auctioneers require bidders to bring a cashier's check with them, usually $3,000 to $5,000, and be prepared to pay a percentage of the home's value on the day of the sale.
"We want to make sure the people doing the bidding are actual, real bidders," he said.
Longly said the professional ethics of auctioneers require them to serve the interests of their clients, the sellers, without misleading or defrauding buyers.
"Our fiduciary role is to represent the seller, but we want to keep our bidders happy," he said.
The rules of every auction are readily available online and on site, but that doesn't always prevent sellers from bending them.
For instance, McCann said a competitor recently held a home auction in the Valley that was advertised as "absolute," meaning there were no reserve prices and the highest bidder would automatically get the sale.
However, when some bids came in lower than the seller expected, "they pulled the plug on the whole auction," he said.
Longly said auctioneers can't encourage sellers to lie about whether they have set a reserve price, but they also can't force an unhappy seller to accept every deal.
"If the seller does choose to call a no-sale on the auction, that's up to the seller," he said.
Sales on the rise
Despite the challenges, it's clear consumers have warmed up to the idea of buying a home at auction.
According to the National Auctioneers Association, gross annual revenue from residential real-estate auctions grew nearly 47 percent from 2003 to 2007.
Automobile auctions still dominated the industry in 2007, selling $87.8 billion worth of cars and trucks, but the fastest-growing sector was real-estate auctions, generating roughly $58.5 billion in sales.
In December, the association launched its own site for real-estate auctions, www.naarealestateauctions.com, which displays properties in a multiple-listing-service-style format.
Most major home-auction companies do business in Arizona. In addition to National and REDC, another big player is Williams & Williams Real Estate Auctions.
Among the three companies, there is usually at least one auction a month in Arizona featuring more than 100 homes.
Weinberg said REDC sold 386 homes during the two-day auction Rubenstein attended, bringing in about $38 million.
"Many of those deals were tremendous bargains," he said, adding that some bidders walked away with homes for $150,000 that had been valued previously as high as $400,000.
REDC President Jim Corum said the auction process can be intimidating to first-time attendees, but the best thing they can do is read the rules in advance and ask questions.
"The single most important thing is for the buyer to educate themselves," he said.
Rubenstein, however, said the bigger problem is that home auctions simply don't always offer the screaming deals they promise consumers.
Asked if he would give auctions another try, he said, "I would definitely not."
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