Home Buying in Redwood City>Question Details

Jenni, Home Buyer in Foster City, CA

Why do banks choose to do an Auction over and REO?

Asked by Jenni, Foster City, CA Wed Feb 11, 2009

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There are two different type of auctions in California. We have the auction on the court house steps to finalize the foreclosure process. Generraly the first lien holder is the one that foreclosres and minimum bid is the balance of the first lien but I have heard of some banks having a lower minimum bid. Often the lien is 80% of the value several years ago but still above today's market value. Purchasing at these auctions have risks due to unknown condition,title issues, and must be paid in full. No loans.

The next form of auction is the public auciton. The banks hire professional auctioneers to sell off 200 properties in a day. It is quite a sight. I have been to one and I do not believe the properties in San Mateo or San Francisco Counites sell any less than current market value. Do keep in mind whatever the final bid a 5% buyers fee is added on to that. Now to your quesiton of what homes go to auction. For the homes I have reviewed in San Francisco and San Mateo Counties it is homes that did not sell through the standard proceedure of listing with a Realtor on the MLS. These homes did not sell generally due to physical condtion and or undesirable location.

I agree with Steve purchasing an REO is a better choice. Much less risk for a similar price. If you choose to try an auction you can have a Realtor represent you. I strongly suggest this. You get their advise, insight knowledge and research at no charge. The auction company pays the Realtor. I am very knowledgable of the peninsula area have some time to help you with REO's invidual or auction purchases.
I can be reached at 877-Lee-Sells (650-358-3959) or lee@leesellsmore.com
Lee Ginsburg
Web Reference: http://www.leesellsmore.com
1 vote Thank Flag Link Thu May 14, 2009
Hi Jenni, one of the major reasons that banks choose to auction their properties rather than take them REO is that they can control the amount of reserve requirements that the bank must keep in cash against REO. Many current auctions are not taking place because the bank would be the only bidder. The banks are just trying to keep as much money as possible available for lending. REO reduces that cash available for lending, therefore reducing the banks' ability to make money.
1 vote Thank Flag Link Wed Feb 11, 2009
The choice might also be a matter of state or federal law. In many states, before a bank may repossess a property, that bank has to file a foreclosure action (hence the lis pendens or notice of default). After the filing, that bank is required by law to wait for a period of time, before foreclosing on and evicting the borrower/home-owner. That bank is also required by law to hold an auction to dispose that property, and if no one purchases that property at the auction, then the bank becomes the owner of the property (now a REO). Now, the bank can do whatever it wants (within reason) to dispose that property.
1 vote Thank Flag Link Wed Feb 11, 2009
Hi Jenni, auctions allow the bank(s) to unload lots of properties faster in this "bid-up" environment. It's really more of a pressure sales environment. I'd stay clear of auction properties. Although you do get some time to do inspections, this is really a process for someone who can walk into a house and know what it will cost to place it back into shape. You can pay to have inspections done, but this might cause you to bid up the price of the home during auction time so you don't waste your money paid for the inspections. Really, there's no reason to be in an environment whose sole purpose is bidding-up a property's price in these times.

According to a Fitch Ratings Special Report on REOs in May 2008, to get properties off their books and reduce long-term carrying costs six out of 10 loan servicers are resorting to auctioning off their REOs now, despite evidence they will likely see bigger losses than if the REOs are marketed and sold in a more traditional fashion. The report goes on to state, "the use of auctions will continue to increase as servicers are faced with growing REO inventories and increasing loss severities." Although losses are typically higher taking an up-front loss at an auction is preferable to taking the time to market a property, the report concluded.

I would wholeheartedly suggest you target REOs - banks are more inclined to "make a deal" once they own the property and are on the hook for prop taxes, insurance, potential vandalism, a dropping market, etc.

Best, Steve
0 votes Thank Flag Link Wed Feb 11, 2009
Depends on laws on how take possession of property transfer of title from seller back to bank, once property is an REO proceed per laws of state list sale the property.

REO - real estate owned property
Web Reference: http://www.lynn911.com
0 votes Thank Flag Link Wed Feb 11, 2009
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