Going Once, Going Twice, SOLD! Buy A House At Auction!

I don’t think real estate auctions would work in anything even resembling a lukewarm market, but let’s have a look at what goes on in areas where financial ruin for one person screams “opportunity” for another…

Once in a blue moon, somebody comes to me and says, “I really want to buy, like, a foreclosure, like, at a huge bottom-barrel discount price, like maybe at auction or something.  Where can I do this?”

I usually reply, “Florida.”

If they feel the need to specify, “No, like, I totally meant, like, here in Toronto, ya know?  Cause like, we want a deal, right?”  Then I know perhaps they don’t quite understand current market conditions.

Okay, maybe that was an unfair characterization.  Not every moron chews gum like a cow and says “like” before every third word, but those that believe your average $900,000 Bloor West home can be found at auction for half-price do, and yes, I’m speaking from experience…

But auctions for real estate have no real place in an efficient, reasonably-warm market, and while I’m sure the cynics will be quick to point out one or two bizarre, one-off instances of a 99-year-old man’s daughter auctioning his house off in Oakville, for the most part, auctions are only common south of the 49th parallel.

I’m in touch with a Realtor down in Idaho who sends me listings from time to time.

If the situation was right, I’d consider buying 3-4 half-built townhouses, that are being blown out by the bank, paying a contractor to finish the houses, and re-selling them at a too-good-to-be-true-in-Toronto profit.

I’ve asked my Realtor to keep me in the loop with any “interesting propositions,” and yesterday, he sent me THIS.

THIS is an auction for a house in Teton Springs, Idaho.

A picture paints a thousand words, doesn’t it?  Here are the photos of this gorgeous 3-bed, 3-bath, 6-year-old log house on 9/10ths of an acre:

Look out the window – that’s the par-4, 6th hole at Teton Springs.  It dares you to hit a driver off the tee, but all you need is a 5-iron that goes 210 yards, and you’re hitting a wedge into the green.  I digress…

The starting bid is $200,000 (with an invisible reserve price, and no bids yet), the house is “valued” at $790,000, and assessed for tax purposes at $470,000.

What’s the catch?

There are several…

1) The property is non-financeable.

Is that even a word?  “Financeable?”  Spell-check says ‘no,’ but the auction site disagrees.

The entire deposit must be paid in CASH, plus the buyer’s premium (more on this in a bit), plus closing costs.

Oh, and there’s no honor system here; you have to prove that you have $$$ in order to bid.

For some reason, I’m picturing a briefcase filled with money, like in the movies…

2) Occupants

The house is currently occupied by somebody who will not leave.

Who is this person?  A tenant, perhaps?

Nope.  It’s the owner.

The bank has foreclosed on the owner, who still lives inside the property, and in cases like this (which we don’t see in Canada), the bank is willing to do anything and everything to get the money they’re owed.  So they see no issue with foreclosing on the owner, selling the house with him inside it, and then leaving it up to the new buyer to get the owner out.

Apparently there are entire books on buying “occupied homes” at foreclosure sales.

The new buyer will have to evict the owner, and get him out.  This is going to cost money; legal fees, notices, and perhaps incentives.  Call it $5,000.

3) No Title Insurance

It’s not possible to get title insurance on this property.

The property is also being sold “as is, where is.”

4) 5% Buyer’s Premium

Call it a “buyer’s premium” if you want, or consider that the buyer is paying the 5% sales commission to the auction house.

Whatever you want to call it, it’s a pretty big closing cost!

The buyer is also responsible for any and all closings costs, with no cap.

5) Red Tape

The documents are available for download on the auction site, which is great!

The only problem: the “Terms & Conditions” are 12 pages, the “Purchase Agreement” is 25 pages, and the “Addendum” is 11 pages.

That’s a lot to go through, and it shows that this transaction is anything but typical!

6) No Agents?

Agents are permitted, but they must be “registered” by the buyer in order to bid.

You know how I rant and rave about those pre-construction condo sales centres that don’t “cooperate” with other Realtors, and how this shows they don’t want the buyers being represented by professionals?  Well, this auction is sort of like that.

If you do use an agent, and you are successful in bidding, your agent gets a paltry 1% fee.  Oh, but you still have to pay a 5% “buyer’s premium” to the auction house.

.

So what do we make of this?

Well, if it seems to good to be true, it often is.

However, if it seems to good to be true in a tough market, maybe it’s actually what it seems.

You won’t be finding any foreclosures in Leaside these days, where the lucky buyer can get a $1.5M house for $400,000.

But here in Idaho, where the bank just wants their money back, the seller is causing headaches, and there is more red tape and restrictions on a transaction than you can imagine, the end result can be quite lucrative for the buyer who jumps through the hoops.

This house actually sold at one point in the last few months for $485,000, but the deal had to be agreed upon by the bank, the seller, and the buyer.  One party didn’t agree to the terms and conditions, and the deal went south.

Now the house is up at auction for $200,000, probably with a reserve of $300K or more, and if a buyer had ALL CASH to finance the transaction, they’re looking at a property that’s likely worth $500K (my Realtor believes with some TLC, it’s worth $550K).

Laugh if you want, and say it doesn’t make sense.  Just try to consider that this is NOT Toronto, and foreclosures like this really do take place, where houses are bought for sometimes half their actual value.

If the bank has $300K in the house, what do they care if it sells for $300,001?  Even if it’s “worth” $600,000 and even if it were sold, fresh and clean, in three months for $599,000.  The bank just wants their money back, that’s all.

I remember the days, ten years ago, when you could buy a downtown Toronto condo, put in a new kitchen and bathroom, and flip it for a profit.  But with transfer fees, a ridiculously efficent market where everybody knows what’s going on, and more supply, what was possible a decade past, is now just a pipe-dream.

For those willing to take on the risk of international real estate ventures, there’s a lot of money to be made…

12 Comments

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  1. Craig Smith says:

    This story reminded me of how I got started buying foreclosed homes in Canada a few years ago.I just want to let everyone who’s thinking of doing this to go for it – it’s not as hard as many people like to make it seem. For example, in my case I didn’t have much money and could not eveb qualify for a mortgage. Still, I didn’t give up and by looking in the right places I was able to secure properties for as much as 50% below market value. If you’re interested, you might want to check out this article, whick explains what I’m talking about much better than I could:
    http://www.bestquicktips.com/canadaforeclosures
    Hope it helps anyone reading this!

  2. […] to David Fleming, author of Toronto Realty Blog, real estate auctions have no place in “an efficient, reasonably-warm market.” He also says […]

  3. Hameed Sammady says:

    I need properties for investments

    1. Sonia Azam says:

      Hey Hameed. I’m an agent with Cityscape. I’d be happy to show you some places. Contact me if you like – sonia@cityscapeone.com

  4. Billy says:

    I looking to buy a upper fix and Auction house. I don’t had an agent. I don’t know any body can help me out for this.

    Thanks

    1. JJ says:

      Hey Billy. I’m an agent with Royal LePage. I’d be happy to show you some places. Contact me if you like – jacobjhammer@gmail.com

  5. Devore says:

    “If you do use an agent, and you are successful in bidding, your agent gets a paltry 1% fee. Oh, but you still have to pay a 5% “buyer’s premium” to the auction house.”

    This is no place for an agent. You need an experienced legal team here, not an agent.

    1. @ Devore

      No doubt about it, you need a very good legal team! An expert in this kind of purchase/sale, although what sounds complicated to us here in Toronto is very, very common to them down there.

      1. Devore says:

        Indeed it is common because of the high rate of defaults and repossessions, and how their systems deals with that kind of inventory.

        Though no one is getting any deals they wouldn’t otherwise get without an auction. The property just ends up selling at market price, assuming there is more than one bidder. You might be the only one if the market is REALLY distressed, but there’s always vultures circling, ready to bid up the price.

        There will be discounts, but they are balanced out by the condition of the property (might need lots of work) or other risks, like previous owner still living there refusing to leave, or additional legal or financial entanglements that have to be resolved and might throw a wrench into the works. Risk reduces price, or increases yield.

        But the same benefits can be gained by the buyer through a regular purchase process. Isn’t the regular house buying process through MLS just an auction as well, when you get down to it? Seller starts with an asking price, and potential buyers submit bids. Usually there’s only one. If there are none, the seller reduces the asking price. Sounds like an auction to me.

        It’s only a deal if you are able to do much of the work yourself, to bring the property to a market-ready state, or if you get lucky and all the big risks turn out to be nothing and everything goes your way. On the other hand, you could have way more trouble and expenses to deal with than you expected.

  6. Geoff says:

    Talk about a great way for the mob to launder money, and they’d have the means to uh motivate the occupant to get the hell out of town.

  7. Sylvain W. says:

    Selling houses/apartments at auction has been par for the course for years in Australia. When I first lived there years ago I couldn’t believe how it was done. And this is without regards whatsoever to market conditions. Auctions happen every weekend of the year and it can get crazy! I’ve seen 100+ people outside a house on a Sun morning with 5 to 10 actual bidders and it’s nuts.

    Have a look at these listings from the Sydney suburb I always live in when I’m in Australia. There are a ton of them that are auctions:
    http://www.realestate.com.au/buy/in-manly%2c+nsw+2095/list-1?includeSurrounding=false&persistIncludeSurrounding=false

    And by total fluke, looking through these I found one of the apartments I used to live in in 2000. 41 square meters (441 square feet) for $600K! http://www.realestate.com.au/property-apartment-nsw-manly-113188503 Although you are a 20 second walk from the beach 🙂

  8. ABB says:

    CAUTION to the person who goes up the steps to tape an eviction notice to the front door — the squatter inside has several AR-15 assault rifles and 25,000 rounds of ammo.

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