I was watching TV the other night and a national auction company ad came on advertising several properties with “previous values” in excess of $150,000 being auctioned at a starting price of $1,000.  I think my mouth started salivating,  Pavlov would have been proud of my training.  Do I know better than to think I could actually buy the property for $1,000 or even $20,000?  Yes, but the greed in my soul that I would never admit to anyone (except you) still is enticed by the possibility.  And then we hear the voice on the ad telling us how people are making great buys at their auctions and we can too.  Our mind plays a trick on us seeing that low offer price and hearing that people make great buys, it tends to stick the two statements together. 

 The next thing you know you are requesting the auction brochure, getting pre-qualified for financing, arranging for the required $5,000 cashiers check and putting the dates down on your calendar to attend the open houses to this “I’m going to make some serious money” real estate auction.  Well I guess the commercial worked.  Think about it next time you see one of these ads, they make it look easy to buy.  They make it look profitable, they appeal to your greed.  They present themselves as high caliber gold plated companies representing the finest Mortgage Companies in the Country.  Wise people say ” If it sounds to good to be true then it is to good to be true.”  Unless you really know what you are doing this can be a disaster to your financial well being. 

We all know that with the proper education we can make money by gambling on the blackjack tables in Vegas.  99.999% of us don’t have the knowledge and experience to make the blackjack tables pay on a consistent basis.  I would not think of taking $200,000+ and sitting down to a table and gambling with it.

So on the designated Open House days you head out to look at homes that interest you.  You better pick about 20 so that you may try to bid on one that is reasonable as thousands of people will be bidding also.  As you arrive at the homes you realize that most do not have all if any utilities. You can not know if the pipes leak, the working order of the air conditioner, furnace, water heater, lights or any other appliances in the homes.  In most cases the yards are dead from the water and power being off.  Auction homes are usually the homes that have not sold on the market for a significant period of time.  I know of homes that were repossessed over 2 years ago that have gone up for auction.  This means that two winters ago these homes went through an unusual 7 day freeze that Las Vegas experienced. Sometimes the power is on but the agents have removed the thermostats so the air conditioners cannot be left on, running up the power bill.  How do you inspect a home without utilities?  But that’s what your left to do in an auction situation.

Wow, talk about the tables being stacked against you as a buyer! 

 Let’s start with a simple definition: Contract- “A promissory agreement between two or more persons that creates, modifies, or destroys a legal relation”- Black’s Law Dictionary.  So we can agree to waive (destroy) certain terms of a legal relationship.  If you ever read the “Terms and Conditions” for a real estate auction you will see this principle in action.  The legal eagle attorneys for the auction companies have covered the Seller and Auctioneer every way possible and then some.  In creating this armor plated shield they have left you totally responsible and on your own in biding on a home at auction.

If you succeed as the winning bidder and the home was a meth lab but someone took down the Health department condemnation certificate and you failed to contact the County to check, too bad you just bought an”X” meth lab.  The point here is no matter what may be discovered after the gavel goes down, you the successful Bidder still have to buy the house or walk away from the 5% deposit (min. $5,000) you are required to give them.

Your going to be in an auction room filled with thousands of people. If you choose one property to bid on, do you think anyone else will bid. YOU CAN BET ON IT!  And even if you are the only bidder you may want to check a couple of items in the “Terms and Conditions.”  “…the Auctioneer may open bidding on any Property by placing a bid on behalf of the Seller and may further bid on behalf of the Seller, up to the amount of the Reserve Price, by placing successive or consecutive bids for a Property…”  So when you see the Auctioneer recognizing bids on the floor but you can’t see who placed them, he may just be enforcing the terms of your agreement and trying to get you to bid higher.  I can tell you first hand that it is impossible to see who is bidding in a room with thousands of people.  You may want to look at this definition courtesy of Luman Auction Company ” Phantom Bid – Bouncing a Bid – Bump – Bid off the Wall (ceiling, fence post, etc.) –  A false bid called by an auctioneer for the purpose of tricking a legitimate bidder into bidding more than he would otherwise have to bid to purchase the lot. The auctioneer pretends to take a bid from a bidder who is nonexistent. Then he asks the legitimate bidder to increase his bid to gain control of the lot. This is fraud.”  Normally with out agreement to the “Terms and Conditions” this would be considered fraud but the contract destroys this right as explained previously.

As you look to see who the Auction Caller is pointing at while he continues his bidding chant you will see the Bid Floor Assistant in a tuxedo flailing his hands jumping up and down and screaming soming uninteligable. I like to refer to them as monkeys in tuxedos.  Then the next thing you know you hear the caller recognise another Bidder and you once again look to see who he is pointing to and you see another monkey in a tuxedo jumping and wailing.  This is all very carefully orchestrated to draw your attention, increase excitement and make you want what you think everyone else wants. At this point the bid asking price has raised way above what you thought was a good value, but you think everybody else wants it so it must be a good deal and we all hate to loose so you raise your number once again and the monkey jumps in front of you pointing at you. (Definition: Auction Fever – The rush of competitive excitement that seizes some bidders during the bidding process)

The Auctioneer just landed a Sucker (definition-A Buyer who does not exercise ceveat emptor “Let the Buyer beware”). After a few more rhythmic calls for additional bidders he calls “Going once, going twice, SOLD  subject to confirmation” and slams his gavel. You just bought a property for more than you wanted.  Immediately a sweet young girl comes to you with a clip board and writes down the property auction number and your Bidders number on a form stipulating that you agree that you have won the bid and reaffirm that you will abide by the “Terms and Conditions.”  She is so sweet and she is congratulating you on your success as is the monkey in the suit.  As soon as you sign this little form she whisks you to the Auction Clerk who once again enthusiastically congratulates you and then has you endorse and surrender your $5,000 cashiers check before you even see any contracts.  If you later fail to sign the contracts, you just lost $5,000 under the “Terms and Conditions.” All the above happens within about 5 minutes before Buyers remorse sets in and you realize you just over paid for the property and now owe 5% more as a Buyers premium to the Auction Company.

So now your seated at an escrow companies desk in the escrow opening area and your presented with a large package of legal documents with the officer once again congratulating you on winning the auction. With your $5,000 gone you are now asked to initial and sign all kinds of escrow/purchase agreement documents without the Sellers signature. The Seller has up to 15 business days to accept or reject your bid. Check your “Terms and Conditions” you agreed to.  The escrow officer then asks you for a personal check to cover the difference for a total of 5% down on the property. Remember that if you fail to abide by the “Terms and Conditions” you loose your $5,000. You now hand over a check for thousands more to the escrow officer who thanks you and sends you out the door with your copies of all the legal documents.

So let’s review your Auction Success:
1)  You got Buyers Auction Fever and over bid on the house you won.
2) You then remembered you have to pay 5% more for the house as a Buyers Premium to the Auction Company.
3) The Auction Company already has your $5,000 cashiers check.
4) You signed purchase/escrow agreements all designed by the same lawyers who wrote the “Terms and Conditions” with the same and additional protections for the Seller and the Auction Company and nearly zero protection for your interests.

So now maybe your feeling a little squeamish about what this carefully crafted auction process has yielded you. You may be thinking that you may have the utilities turned on so you can pay to have everything checked out and make sure your not buying another $30,000 in repairs or more.  You have the right to do that right after closing but not before.  Didn’t you check the “Terms and Conditions?” and your purchase/escrow instructions? “No properties will be open for inspection or access after the auction until closing has occurred.”

I think by now you can see how real estate auctions are very carefully orchestrated to exact the most money for their clients (Mortgage Companies).  The specialist use every conceivable legal and psychological technique to lure Bidders through wonderfully produced commercials, web sites, brochures to impressive auction locations with music, huge display screens, professional formally dressed Auction Criers, Floor Assistance (Tuxedo monkeys) to using the crowd against itself.  From how they first get your money as a winning bidder to the completion of the purchase, everything is manipulated and orchestrated by them for their benefit. 

Now some of you are thinking that you can take your agent to represent you in the purchase.  What you are not recognizing is that in a normal real estate transaction your agent has the power of writing the ”Purchase Agreement” protecting your interests.  Under the “Terms and Conditions” that you accept in the auction you are forced to accept the Sellers “Purchase Agreement” without negotiations in your best interests. 

So what is my advise to anyone thinking about going to an auction?  DON’T!!!

You can generally get just as good of deal if not better through an agent and buying an REO (bank owned) property.  The agent can use CMA’s (Comparative Market Analysis) to help establish the price your willing to pay. You can have inspections done on the home you choose. You are not under false pressure to bid. You do not pay 5% more for the home as a Buyers Premium. You are not manipulated, restricted and in some cases deceived through the use of the “Terms and Conditions” of an auction agreement/contract.  You control each step of the process in buying an R.E.O.  using your Buyers agent. 

Occasionally someone makes a great buy at a real estate auction.  Occasionally someone wins millions of dollars in a slot machine. Occasionally!

By way of avoiding law suits, you need to know that all the above is to be considered personal opinion and not fact.  Please check the particular auction companies “Terms and Conditions” carefully to see what restrictions you may be subject to and the results of those restrictions. 

Finally you may wonder how I know so much about this process.  Even I have fallen victim to these specially staged auctions. The experience is first hand.  There are a very few ways that you can get out of an auction escrow so you may want to use an agent with experience in auctions if you insist on buying.  You must arrange for your Buyers Agent at least 4 to 5 days in advance of the auction and they must accompany you to the check-in desk and be present when you sign any paper work.  Agents have requirements to meet with the auction company as well.

So now you know some of the Dirty little secrets of the magical web spun by Real Estate Auctions. 

Stay tuned for my revelation of the next Magic trick in Las Vegas real estate “Repo’s now you see them, now you don’t!” Don’t forget to check out the latest monthly Las Vegas real estate statistics and commentary on front page of my site at www.MaxSellsVegas.com