In the real estate market, some sellers, particularly banks, turn to auction companies when a property fails to sell through traditional listings. While these auctions are heavily marketed as a way to generate excitement and potentially secure a higher price, they are often viewed as primarily a marketing scheme with specific risks and rules that buyers must understand.
Understanding REO and Property Auctions
The most common properties sold through non-traditional auction companies are REO (Real Estate Owned) properties.
- REO Definition: An REO property is owned by a bank or mortgage lender after a home has gone through the foreclosure process but failed to sell at the required public foreclosure auction (often held on the first Tuesday of the month).
- Bank Motivation: Banks do not want to own real estate; their business is lending. They acquire the property back by entering a “credit bid” for the amount of the outstanding loan. Since the bank wants to liquidate this non-earning asset, they hire Realtors or, increasingly, third-party auction companies to offload the inventory.
These auctions are marketed as a way for investors to get a “deal,” especially when a property has been sitting unsold and became “stale” on the Multiple Listing Service (MLS).
The Marketing Strategy: Reserve Bids and Buyer Pools
The use of an auction company is often a sophisticated marketing strategy designed to generate interest and draw a new pool of potential buyers that may not actively look at traditional MLS listings.
- Bait and Switch: Auction companies often suggest starting the bidding price very low to widen the initial buyer pool. This gives the illusion of a potential “steal.”
- The Reserve: However, sellers, particularly banks, protect themselves by setting a confidential reserve bid. This is the minimum price the seller is willing to accept. If bidding does not reach the reserve price, the property will not be sold. This protects the seller but means the buyer is unlikely to get a true bargain.
- The Investor Mindset: A significant segment of real estate investors hunt specifically for auctions and REO properties, believing they can secure a deal. Auction houses cater to this mindset, providing a venue for these investors who may not attend the official courthouse foreclosure sales.
Legal Pitfalls for Buyers: The Auction Addendum
Buyers interested in these auction properties must proceed with extreme caution, as the purchase process is often complicated by extra legal documents.
- TREC Contract: Most real estate sales in Texas use the standard Texas Real Estate Commission (TREC) contract.
- The Auction Addendum: When purchasing an auctioned property, the sale will include a lengthy Auction Addendum. This addendum typically supersedes or trumps specific provisions in the standard TREC contract. It contains the auction house’s specific terms, rules for bidding, financing deadlines, and disclosures, and must be read carefully. The contractual terms in this addendum protect the seller and auction company, often making the purchase more difficult and less flexible for the buyer.