BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Real Estate Auctions
Q: I am hearing more and more about real estate auctions. How do they differ from regular sales and what do I need to know about them?
A: In times when there is excess inventory on the market, some sellers, and their agents, turn to auctions to dispose of those properties. There are a number of different types of auctions of which agents should be aware.
FORECLOSURE AUCTIONS: We are not talking here about the proverbial “auction on the courthouse steps” of properties being sold at foreclosure. (By the way, the foreclosure auction doesn’t necessarily need to actually be on courthouse steps, it can be in any public place.)
Those types of auctions are conducted by the trustee under a deed of trust, usually a title company as specified in the deed of trust. Usually, the foreclosing lender bids in the amount due to them. If there is no overbid, the lender then takes the property into its REO inventory and sells it later as an REO sale.
If there is an overbid, then the successful bidder acquires title to the property.
It is dangerous for inexperienced agents to attempt to represent buyers/bidders at these types of auctions because a great many of the bidders at these foreclosure auctions are professional buyers – not a place for amateurs.
Also, the bidder/buyer needs to know which loan is foreclosing. If a junior lienholder is foreclosing, the successful bidder is taking the property subject to the senior liens.
PUBLIC AUCTIONS OF REAL ESTATE: Apart from the above, generally, there is no legal difference between an auction of real estate and other sales. The seller still must do the same types of disclosures:
A. If the property is a single family residence, then the seller must do all of the same disclosures as for a single family regular sale.
B. If the property is a unit in a subdivision, condominium complex, condo conversion, or tenancy in common (“TIC”), then the same disclosures which would be required in a usual sale apply when there is an auction of those properties.
C. If the subdivision, condominium complex or conversion, or TIC has five or more units, it must be sold pursuant to a “Public Report” from the DRE, and all of those DRE rules apply.
See Weekly Practice Tip “Public Reports”
Also, see CAR disclosure charts entitled “Sales Disclosure Chart” and “New Home Disclosure Chart”
AUCTIONEERS: Surprisingly, there is no DRE regulation of auctions, nor separate regulation of auctioneers who conduct real estate auctions. However, if an auctioneer is selling real property, the auctioneer must either be a licensed broker, or work with a DRE-licensed broker.
The DRE requires that all activity “for which a license is required” in connection with an auction sale of real property be conducted by a licensed broker.
So, in the usual situation, on the listing side, the listing broker works with an auctioneer who typically is not a
In other words, the auctioneer conducts the auction; the listing agent does all pre-auction selling activities, and works with the successful bidders on closing the transactions.
THREE PARTY AGREEMENTS: On the listing side there is usually a three-party agreement between the seller, the auctioneer and the listing broker specifying who will do what, who pays for what, and how the broker and auctioneer are compensated.
REPRESENTING BUYERS: In most auctions, buyers will be asked to register, and to provide some deposit, in order to qualify for the auction. This deposit is returned if the prospective buyer is not a successful bidder at auction.
The successful buyer will be required, in most cases, to buy the property with no financing or inspection contingencies. Buyers usually are given an opportunity to inspect the properties and satisfy themselves as to the condition of the property prior to the auction.
Also, buyers must have their financing lined up prior to the auction, as they will be given a period of time after the gavel goes down to close, but cannot cancel if they cannot obtain financing. If they do so, they will be considered to be in breach of the contract.
Finally, buyers will have to sign a purchase contract which has been drafted by attorneys for the listing broker or auctioneer. These contracts usually have pretty strong “as is” provisions, and have waivers and releases regarding the condition of the property.
PRACTICE TIPS
1. Do not represent any bidder/buyers at foreclosure auctions, or even assist a potential bidder/buyer with information about the property for such a sale, without the approval of your broker – and then only if you know what you are doing. Don’t do this if you have no experience in these types of sales.
2. Be aware that disclosures in auctions are dictated by the type of property being sold – and not the fact that the process for the sale is the auction. To determine what disclosures are required ask, “If this weren’t an auction, what disclosures would be required for this property?” Then do that.
3. When representing a buyer at an auction:
a. Be sure to accompany the buyer to the first visit to the property site as your buyer will be required to register. If you are not there, the listing broker may have rules that prohibit you from getting paid. (But, if that particular unit that your client buys was in MLS, the MLS rules regarding cooperating compensation may apply.)
b. Advise your buyer that they MUST have adequate financing lined up because the purchase agreement likely will not have a financing contingency.
c. Advise the buyer to fully inspect the property to the extent allowed by the listing broker and seller to fully satisfy himself/herself as to the condition of the property.
d. Obtain a copy of any printed terms and conditions of sale. Many auctioneers have such terms and conditions printed and available prior to the auction. Be sure your buyer has a copy and has been advised by you to read and understand them prior to participating in the auction.
e. Remind the buyer that he/she will be signing a purchase agreement drafted by attorneys for the listing broker or auctioneer and, like all attorney-drafted documents, you recommend that he/she has the contract reviewed by his/her legal counsel prior to attending the auction. The buyer may not do so, but you have at least have issued the warning to do so.
f. If the property being sold is new construction, either by the builder/seller or by an REO/lender seller after a foreclosure, and the buyer is concerned about whether there may be recourse against the builder for any defects, send your buyer to his/her legal advisor for answers to those complex set of legal questions.
See Weekly Practice Tip “Buying REO New Construction”
g. As usual, document your file regarding all of the above.
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This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.