“I keep seeing these ads for an auction company. I went on their sites and the opening bids are very low compared to what the homes previously sold for. What do you think of buying a San Diego home from an auction site?”
Answer:
I’m not going to call it a scam. Let’s just say that what you see on the site (by this company that shall remain nameless) could be a tad misleading.
Here’s what you need to know:
1. “Previously Valued To”
All homes show a “previously valued to” price. That’s what it’s worth, right? Nope. Then it’s what it last sold for, right? Nope. Their site says: “The previously valued to price is based on the higher of A) the appraised value of the property… B) the most recent asking price, C) the assessed value, or D) the most recent broker price opinion.” Bottom line: ignore this figure completely!
2. Opening Bid
The opening bid is a fantasy number set intentionally low to get you excited. Know this: they won’t let you buy the property for anything near it. You must meet or exceed their “reserve price.”
3. Reserve Price
“Congratulations, you’re the high bidder, but…” These auctions have a secret reserve price—the lowest price the seller will accept. If bidding ends below that, they almost certainly won’t let you buy the property. Sorry.
4. Shill Bidders
In previous auctions, this company disclosed in small gray print that they or the seller had false bidders bidding up the price. Not sure if that’s the case with these auctions. But isn’t that a little sneaky?
5. 5% Buyer Premium
It’s easy to miss or forget that you pay a 5% fee slapped on top of your “winning” bid. That can turn a bargain into market value or higher.
…How do I know all this?
From 2007-2009, my team and I handled the behind-the-scenes work for the sale of dozens of foreclosure auction properties. My team cleaned up the properties, gave our “broker price opinion,” held them open, etc. FYI, we had no involvement in the auction process itself, including the tricky stuff.
