When an auction is only sort of real
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TESS VIGELAND: We talked earlier in the show about how foreclosure rates just keep going up. One side effect is the booming business of foreclosure auctions. Banks hire auction companies to off-load properties that the original owners couldn’t pay for. And bidders sign up by the hundreds hoping for a great deal on a house.
Sean Cole recently reported on the trend for us. But then he stumbled across an aspect of these auctions that you’ll want to know about if you ever attend one. Here’s Sean.
Sean Cole: So the auction was held in a small ballroom at the Boston Park Plaza Hotel. And this thing happened about midway through that really kind of put a bee in my ball cap. It happened to this kid; I call him a kid. His name is…
Gardiner Bowen: Gardiner Bowen.
Cole: And what do you do.
Gardiner: I’m a real-estate investor.
Cole: I hope you’ll forgive me for saying so, you seem very young to be a real-estate investor.
Gardiner: I am.
Cole: How old a guy are you?
Gardiner: I’m 23.
I didn’t even know what real-estate investing was when I was 23. And here Gardiner was already a landlord. He was also one of more than 200 bidders at the auction that night, all competing for just 36 properties. But Gardiner had his eye on one in particular — a rundown, single family house in Bristol, R.I. He’d seen it and told me it needed $60,000 in repairs and was in the middle of nowhere, which he liked.
Cole: Why does that appeal to you?
Gardiner: I rent to college students. And having a house in the middle of nowhere means no neighbors. I’m only going to be bidding on one. That’s the only one. Yeah. Keep that between us.
Cole: I will. I will. But after the auction I’m going to see if you… I hope you get it.
Gardiner: I’ll let you know after the auction then.
Cole: Please do.
Gardiner: All right.
Auctioneer: Ladies and gentlemen start the bidding at $19,000 and who came in to buy this one now. $19,000 to buy, $25,000.
Ten houses went up on the block before Gardiner’s. And I just have to take a moment to say these events are truly entertaining. The auctioneer holds court from this high podium, wearing a tuxedo. Two other guys in tuxedos work the floor egging people on to bid more. And every time a bid card goes up, one of the spotter guys lets out a little yelp and cups the air like he’s catching a penny.
Auctioneer: 50. Now 60.
Bidding assistant: Yup!
Auctioneer: 70.
Bidding assistant: Yup.
Bidding assistant: Yup.
Auctioneer: I’m bid $60, $70,000, now $80.
Also the auctioneer doesn’t say “Sold!” after the bidding like you’d expect. He says this instead:
Auctioneer: Subject to confirmation sold at $20,000, subject to the sellers confirmation. Let’s go to Bristol.
This was Gardiner’s house originally valued at $305,000. The bidding started at just $49,000. And went up really quickly.
Auctioneer: Bristol. 49. 50. 60. 60. 70. I’m bid 60 riiiight here $70,000 to buy. 60 riiight here, $70,000 to buy, $80,000 now.
Gardiner didn’t want to spend more than 60,000, but he hung in. And in the end, with a bid of $87,500, he landed the house.
Auctioneer: It is history. And subject to seller confirmation your way. Thank you.
Or so he thought. He and his mom were quickly led over to the financing area to the right of the stage. And just as quickly, they came back. Gardiner slumped down in his chair like he’d been punched. His mother, Judy, said, “They wouldn’t sell it to us.”
Judy Bowen: The bank will not accept the bid.
Gardiner: It has a hidden reserve. So I drove up here, spent the night, paid to get here and still can’t buy the property. Even though I won the bid.
Judy: But what does that mean, a hidden reserve? I mean like…
Dan Saccoccio: It’s not an absolute auction.
This is the broker Dan Saccoccio. He said absolute auction is an industry term.
Saccoccio: Absolute means it’s a real auction and whatever you bid on, that’s the price.
Which is what we think of when we think of an auction. But there’s another kind, a “subject to lender confirmation” auction.
Chris Longly: With subject to lender confirmation auctions, the bank has a price that must be met.
This is Chris Longly, a spokesman for the National Auctioneers Association.
Longly: And so there is a reserve price set.
Cole: So when the auctioneer, at the end of the bidding, says, “Subject to lender confirmation,” that’s what he means.
Longly: Absolutely. It is not sold. It is sold, subject to lender confirmation.
Cole: How many foreclosed home auctions are absolute auctions?
Longly: I have not come across any absolute foreclosure auctions yet.
Cole: Is that OK?
Longly: Yeah. You know, our job is to represent our seller. In this case, it is bank. You know, many of these properties are selling, but some are just not getting a price at the auction block that meets the needs of the bank.
Now, lots of auctions have reserve prices; eBay has reserve prices. But at this auction it came as a surprise. At least to Gardiner and me. The company that held the event is Real Estate Disposition Corp., or REDC. And it said the reserve condition is clearly stated in the terms and conditions handed out ahead of time. And it is — at the bottom of page five.
I asked a spokesman, Rick Weinberg, why the auctioneer didn’t spell it out verbally into the microphone.
Rick Weinberg: Well, we feel our auctioneers, and people who run the auctions do do that and do a great job.
Cole: You feel that or they do actually do it? ‘Cause they didn’t do it at the Boston auction. That’s the only reason I ask.
Weinberg: Well, they are instructed to say many different things and that is one of them.
To be clear, I recorded almost all of the opening remarks and listened back to all of that tape. There wasn’t anything about reserves. Also, if the banks want a certain price for these houses why not set that price as the opening bid? Some of these opening bids were as low as $500, which seems to say, “Look! You can maybe get a house for that much!”
Weinberg: No. No. That’s never said. That’s never said, and you’ll never find it anywhere.
Cole: Yeah, it’s kind of implied, though, you know, if I’m looking at a sheet and it says “Opening bid: $1,000.” I’m like, “$1,000? Oh my God.” Even if it goes up to $40,000 that’s still $40,000 for a house.
Weinberg: But then someone has to do their homework and realize it’s not an absolute auction.
Cole: How would they know to do that kind of work?
Weinberg: Well, they have to do their homework. They have to do their due diligence.
I talked to the bank that owned the house Gardiner bid on. They didn’t want to go on the record, but they said that when you start the bidding low, there’s a better chance it’ll end up way above the reserve. That’s just how auctions work they said.
Auctioneer: Ladies and gentlemen that concludes our sale tonight.
After the auction, Gardiner and his broker and his mom complained to the people in charge. It started as a gentle chat and quickly escalated into what looked like a fairly heated scuffle. The broker asked me not to record that part. And in the end, to its credit, REDC agreed to present Gardiner’s offer to the bank.
Trent Ferris: And in this particular case, the young man actually was willing to discuss some other information about the property.
This is the vice president of auctions for the company, Trent Ferris.
Ferris: And while we don’t think the seller’s going to accept it because it was a subject to…
Cole: You don’t think the bank will come down?
Ferris: You know, I don’t know. I don’t know. That’s why we’re going to be willing to go ahead and give him the opportunity on it.
I should point out that disputes like this are not common. They do happen and one analyst told me they used to happen a lot more before banks got more realistic about housing prices. Also, REDC only gets paid if the house sells. It makes its money from a 5 percent buyer’s premium.
Gardiner: It’s in their best interest to help us out and figure out a way to get the information to the bank.
I caught up with Gardiner again as he and his mom were finally filling out forms.
Gardiner: And that’s kind of what they explained to us, after they found out I was upset with the way that the system worked.
Cole: So you told them you were upset.
Gardiner: Oh yeah. Just like I told you.
Cole: And how did they react when you told them you were upset?
Bowen: I’m signing papers now.
And a little more than a month later, the deal finally went through. And Gardiner was the proud owner of a rundown house in the middle of nowhere that needed $60,000 worth of work.
In Boston, I’m Sean Cole for Marketplace Money.
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