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The auction process is daunting, at least to the untrained eye.
The auctioneer at a tax foreclosure auction reads off the case number of a house, its address and an opening bid. Potential bidders shuffle papers and scroll through spreadsheets and emails, while some whisper to the person next to them.
"Most of them are wannabes," Jerry Caldwell, a real estate investor, says outside one auction, which is held monthly in the dingy basement of a Dallas courthouse and at other courthouses around the country.
The auctioneer opens bidding on a property in a gated community outside Dallas. Sometimes no one bids among the crowd of about 100 people, and he quickly moves on to the next property available. But this time, he gets a bite. Bidding starts around $50,000. Caldwell jumps in.
"It takes a lot of courage to stick your hand up and spend 50 grand if you haven't done it lots of times," he says. After an extensive round of bidding, Caldwell wins with a $266,000 bid for a house worth about $440,000.
Auctions, whether through public foreclosure auction or a private auction house, present a sometimes-frenetic way to sell a house. Some think auctions give an immediate, true market value, according to interested bidders.
"Put five people in a room, and they'll tell you want they want to pay," said Chris Longly, deputy executive director of the National Auctioneers Association.
But the process differs vastly from traditional home sales, sometimes making it an insider's game.
"You've got to be brave. This not for the meek," said Frank Donnelly, president of the Washington, D.C., branch of the Mortgage Bankers Association.
In 2008, the latest year tracked by the National Auctioneers Association, auction houses sold an estimated $17.1 billion worth of residential real estate.
Those sales grew nearly 50% from 2003 to 2008. The NAA has not followed home sales since because titles do not distinguish the method of sale for a house, Longly said. Residential real estate outsold art, antiques and other collectibles that sold for $12.4 billion in 2008, though that paled in comparison to the $83.1 billion in automotive auctions.
But in 2008, auctions sold just 1.4% of all existing homes as a percentage of dollar volume, the National Association of Realtors said. About $1.19 trillion in existing homes sold that year.
That likely translates to a current market for auctions of between 1% and 2% of all existing home sales, according to NAR. The group factors in auction sales into total sales in its benchmark technology.
J.J. Dower, NAA vice president, said auctioneers likely saw slightly more existing-home sales in 2011. "That market's turning a little bit," he said.
Auction.com sold about 24,000 homes worth $2.5 billion in 2011. That's up from 23,000 homes worth $2.2 billion in 2010.
Williams & Williams sold nearly 65,000 properties, mostly bank-owned properties, over the last five years, according to Chief Marketing Officer Amy Bates. That includes about 10,000 in 2011, down from 15,000 a year earlier and flat with 2009 totals.
Bates said the Tulsa, Okla.-based company expects the same or slightly fewer sales in 2012. Pressure from the presidential election will lead to fewer foreclosures, she said.
"We're dependent on what our sellers are putting through the pipeline," Bates said. "We just respond to needs and we're available as our sellers need us."
Hudson and Marshall, a Dallas-based auction house focused on real estate owned properties, declined to disclose its sales data. Kelly Hinerman, vice president of operations, said he'd rather not share it with competitors.
Hinerman said the company saw a lower volume of properties in 2011 than in 2010.
"Right now, we're just not seeing the houses available for auction," he said.
The NAA does not track the number of real estate auctioneers or auction houses either, though Longly said the vast majority are smaller, family-owned businesses. One of these smaller auction houses, Georgia-based Rowell Auctions, sold about 1,600 properties in 2011, according to its national sales coordinator Doug Dennison.
Property listings at foreclosure auctions hit a nine-month high in November, data firm RealtyTrac said, with auctions scheduled on about 96,500 properties nationwide. That suggests an uptick in foreclosures, though those listings were still down 17% from November 2010.
Trustee and sheriff auctions, of course, differ from those run by auction houses as the former exclusively involve foreclosures. The use of an intermediary varies as well, with the bank or titleholder going it alone in a trustee sale.
Some auction houses, such as Auction.com, run third-party trustee sales. The company placed a stronger emphasis on them in California during 2011, and shortly after moved them to Arizona, as well. It plans to expand to more states in 2012.
"Some of us have been doing third-party sales for years," Auction.com CEO Jeff Frieden said. "This is nothing new."
The difference now, Frieden said, is the sales rate. The company's clients saw sales rates increase from between 20% to 30% up to as high as 70%. He said his company offers title insurance and compiles title reports on each asset up for auction.
"We've handed it to them on a silver platter with a lot of education, a lot of information," he said. "We've made it much safer, if you will, to buy it."
A push online
The allure of online bidding, Dower said, doesn't appeal much to his generation. The 50-and-older crowd still likes the social aspect of a live, on-site auction. But online auctions do attract 20- and 30-somethings more accustomed to life online.
"Everything they want, they want it now," Dower said. "People are bidding at 3 a.m. from their recliner. It's just a 24/7 convenience issue."
In 2007, online auctions made up 1% of all sales for Auction.com, formerly known as the Real Estate Disposition Corp. Now, Frieden said, they account for 70%.
"Today, you could be at Johnny's soccer practice," Frieden said. "We actually get more participation in our online auctions. You're really opening up to the world."
For Williams & Williams, winning bids typically come from those on-site at an auction, said Elsa Lewis, executive vice president for residential sales. Those bidders, more fervent about properties, draw into competition with each other.
But online bidders do drive up the price, Lewis said, as more on-site auctions include an online component. Price increases average 9% to 11%, she said.
Auction buyers contrast with the typical homebuyer.
Longly, with the NAA, said bidders fit into a dichotomy of investors and traditional owner-occupied homeowners. The percentage of that mix depends on who's asked.
Investors make up 60% to 65% of sales at Hudson and Marshall, Hinerman said. He said that's because the company usually gets an adverse selection properties, houses in too poor condition for an owner-occupier.
Auction.com, in its REO auctions, said it breaks down to a 65-35 mix, in favor of owner-occupiers.
Williams & Williams sees a varying ratio of investors and end-users. It depends, Lewis said, on price. Properties listed for less than $50,000 typically attract investors, while owner-occupiers buy above that number.
Investors made up 19% of all existing home sales in November, according to NAR, with all-cash sales at 28%.
It's hard to measure exactly what buyers do with the houses they buy, Auction.com's Frieden said. He estimates about 60% of investors who buy from his company resell properties, while 40% rent them out.
Caldwell, who began investing on his own behalf in 1978, said the availability of cash is the biggest restriction for an auction participant and investor. His own financing comes from a bank credit line, he said.
Many smaller investors, though, have popped up at auctions in recent years, and are more likely to buy fixer-uppers, Caldwell said.
Frieden called that small investor "Joe Long Bed," in reference to their pickup truck.
"No institution can manage commercial or residential real estate as well as a local investor," he said. "You cannot replace that local knowledge."
Auction houses, however, generally prefer to sell to an end-user. Owner-occupiers can usually afford to pay a little more for a house, Dower said.
Sometimes investors who frequently go to auctions can often get a little too close, giving themselves an unfair — or illegal — advantage.
Bidders, along with auctioneers, can rig the bidding or auction process to reduce prices and increase their own profit margins.
The Sherman Antitrust Act, passed in 1890, prohibits bid rigging because it limits market competition. The maximum penalty carries a 10-year prison sentence and $1 million fine.
In investigations considered ongoing in 2011, authorities have charged at least 28 people for bid rigging, according to the Department of Justice's Financial Fraud Enforcement Task Force. Many later pleaded guilty.
One investigation in San Joaquin County, Calif., resulted in charges against 14 people, most recently four investors and an auctioneer Dec. 7. A grand jury indictment said those charged fraudulently acquired titles at auction in an agreement not to bid against each other. Instead, they would hold their own auction after one acquired a property. The added profit would go to the co-conspirators, instead of the seller.
A scheme participant, in theory, could make money without ever bidding, said Assistant U.S Attorney Russell Carlberg, a prosecutor on the San Joaquin case. A concerned investor alerted authorities in that case, starting a now two-year investigation.
"It's an easy fraud to perpetrate with a lot of potential profit," Carlberg said. "The incentives are there and sometimes the conditions make it easy for this to occur."
In other bid-rigging cases, people can simply agree not to bid against each other on certain properties. That practice is nothing new, Longly said. It typically happens, when it does, at events with numerous properties for auction.
"Usually, we can tell," Longly said. "It's not hard to see four bidders in the back of the room talking."
Auctioneers, concerned about their reputations, do a lot to prevent any illegal activity, either putting a "no-sell" on a property or throwing out anyone suspected of wrongdoing. Still, Longly said he'd rather not divulge tricks of the trade used to eradicate any bid-rigging pests.
Last-ditch or better method?
MBA's Donnelly, who works for a mortgage lender in Washington, said auctions likely provide one of two options — a way to unload property quickly, or as a last resort. His employer prefers to connect with a local real estate agent to sell foreclosed property. He could see, though, if banks unequipped to deal with REO would need to sell the property quickly.
Auction houses disagree with the last-ditch notion. Frieden, Auction.com CEO, said auctions can sell assets quicker and more efficiently than a traditional sale with a real estate broker.
"Servicers are starting to see that this is not the last resort of liquidation," Frieden said. "This is actually a retail method that can be moved up in the process, which helps them get their accomplishment of selling whatever it is they're selling."
Lewis, with Williams & Williams, said some perceive auctions as "a way to offload properties, but that is not really how we approach it. Auction, we believe, is the best strategy for real estate."
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