What happens if home isn't sold at REDC?

Question

Hello all--what a whirlwind this market has been!

I have a few inquiries--but first some background info:

We looked at a house 8/6/11 and our realtor went to write up an offer for 8/8/11. She discovered that the FM owned home was turned over for auction on 8/3/11! We were just a few days too late!

So we put a pre-auction offer on auction.com. They asked for our pre-approval letter, Earnest money and a copy of a check 24 hours later. We were putting together the docs and right before submitting, we received an email saying the seller turned down our offer. It was nearly $100k over the starting bid amount, too. We're serious buyers and wanted to put in our initial offer because we don't want to fool around. This will be our Primary residence and are not looking to flip the home, or sell anytime soon, etc. Basically the house was an amazing deal even when it was on market.

We are planning on attending the REDC auction, scheduled for mid-sept. rather than submitting another pre-auction bid. I have heard that many winning bidders are unable to deliver at closing and that we should stick around even if we aren't the high bidder to see if the house gets tacked onto the end of the whole auction.

What happens if they reject offers and/or no one bids on the house? Does it go back onto the market again? How many times does this happen? Looking at the history while on the market with FM, the price has dropped significantly over the last 6 months. Do they send it to auction often, and then place it back on Mkt afterwards? There is no history of anyone making an offer on it, so we feel confident about it--but are not counting on getting it for a song, like the price it's advertised at.

Anyway, comments/advice/suggestions/experience is welcome and greatly appreciated.

Cheers! (& wish us luck!)

Alex K. · Answer

Be very weary of these auction companies. They are scum bags. Their goal is to get the bidding above the reserve price by any means necessary. They use hype and high pressure, shill bidders, lies about buyers not coming through, etc. And to top it off, even if you "win", the seller can still reject your offer but you are bound by it if they accept. Here's how it works: REDC drums up offers and they have a reserve price in mind. If an offer is above that, they submit it to Fannie Mae (usually the seller). If it's below that it is rejected by the auction company. So your pre-bidding offer was too low, and you won't get it for that price during bidding. I have bought two properties from auctions, one of them REDC and the other Hudson and Marshall. I knew they were rigged but I managed to get pretty good deals anyway. Have a max number in mind going in based on the math. Don't let the emotion of the moment swing your max number higher during the bidding. To answer your question about what happens if it doesn't sell: I think it goes back on the MLS or to another auction company. The house I bought from REDC was previously auctioned at Williams and Williams and the sign was still on the property.

Steve L. · Answer

Fannie Mae has a lot of systems for how to handle properties. First they give it a listing agent and have them evict the tenant. If someone lives there the agent is responsible to evict them or offer cash for keys. Once it is ready they usually start the price pretty high. Every 30 days the listing agent is allowed to request a price reduction (depending on activity, etc). They have to do a BPO to request one. After the listing expires with the first agent (3-6 months) they either give it to another agent or send it to REDC/Williams & Williams/etc. If that doesn't work they will re-assign it again to another listing agent and progressively keep lowering the price. Lastly, they will send it to a bulk sale program.

J Scott · Answer

REDC (and presumably the other auction companies) are just lead-generation systems employed by the REO listing agents, with approval from the sellers/asset managers. The auction company's goal is to generate as high a bid as possible and submit it to the seller; if the seller approves, the auction company gets their 5% commission and if not, the house either goes back to the auction company for additional lead gen or back to the listing asset/asset manager for marketing/sale.

Eddie P. · Answer

I have accompanied a friend to some of the REDC auctions. My conclusion is they are all hype. These are reserve auctions meaning the owner(not REDC), has indicated the minimum they are willing to accept. They cause a media and public frenzy advertising homes starting at $500, knowing darn well the owner of the asset would never accept it. My friend actually was the high bidder on a condo that started at $1500, by the bidding ended, she had the high bid at 58,000( just under market price). She gave them a required deposit of $5000 and waited for almost 2 months then got the news the bank had rejected her offer. It ended up on the mls again. The last auction I was emailed on was Williams and Williams. I was tempted to attend it but did not, 2 out of the 3 homes in my area ended back on the MLS.

Account Closed · Answer

Thanks everyone for your input. This has been an interesting learning experience. Part of me feels up to the challenge (and inevitably gaining more experience), while the other part of me wants to look at other homes just so I can have a "normal" buying experience. The house I have my eye on is still in pre-auction. I expect it to go to online auction within the next few days and might bid again there. I'm not looking for this opportunity to be a buy and flip house--either way, a home is an investment of course, but I plan on spending the next 10-15 years at my next residence. If I can get a decent to amazing price, then so be it. But I don't feel like killing myself to get it. A word on the evicting tenant thing that Steve mentioned above. I don't believe anyone can just evict a paying tenant just because the owner has not paid the mortgage and the house has gone to auction. In fact, there are existing rights now that were put into place because it's happening more often in this market. If you buy a house and plan on occupying it, and there are tenants there, you must give them 90 days (I don't know anyone willing to wait that long to move into their new house). If you are an investor, you must honor their lease...or come up with a compelling offer to buy them out of it. If the home goes back to the lender, they must honor the lease, too. Or offer a compelling (and I mean compelling) cash for keys opportunity. An eviction notice can/will be posted all it wants to--but it means nothing to tenants who know their rights. Thanks again, everyone--I'll let you know how it goes.

Alex K. · Answer

When I said "based on the math" I meant that you should have a maximum price you are willing to pay for the house based upon the investment return. Different investors use different metrics for evaluating a deal such as cash on cash rate of return, monthly cash flow, internal rate of return, etc.

Account Closed · Answer

So even if our offer was pretty close to what is was when on the market a few weeks back, they don't refer to that price and consider? Or was that a price to attract buyers? It started at $540 in Feb 2011 and dropped to almost half that by a few weeks ago. Are they now looking/hoping to get around $540 for it now? Sounds greedy/silly to me. When you say "based on the math" what math are you talking about? Thanks so much, Alex, for your input!