By Dale W. Schaetzke

As interest rates rise and the real estate market continues to soften, more and more property owners will find themselves unable to meet their financial obligations. One of the results of this trend will be an increase in property auctions.

For the educated investor, property auctions represent an outstanding investment opportunity. For the beginner, however, auctions can be confusing and fraught with financial risk. What follows are five common mistakes made at property auctions and my suggestions for how to avoid them.

Mistake #1. Failure to Bid.

I can't tell you how many times I've heard a losing bidder complain that they were willing to pay the highest bid at auction but... somebody else won the bid!

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If you are prepared, confident in your assessment of the property and familiar with the particulars of the auction, bid up to your predetermined high bid. You just can't know when the bidding will stop. If you have the high bid when bidding ends and you are at - or even better, under - your maximum bid, you have just turned your efforts into a payday for you.

The only step more critical to acquiring property that suits your purposes at foreclosure auctions than bidding is determining (beforehand is best) when to stop!

This could be an entire article unto itself, covering such topics as the mortgage position, municipal liens, title defects, zoning regulations, property condition, environmental contamination, neighborhood activity, local market conditions, etc. The bottom line however, is that if you aren't the high bidder on a property you find desirable, you are not achieving your objective. That is, "To identify and purchase desirable property at a price acceptable to you."

The more you know about a particular property, the more comfortable you will be with both bidding and being the high bidder. By doing your homework, you are taking steps that others might prefer to skip in favor of going to many auctions in search of "the deal."

Each item of data you gather on a property before the sale adds to your confidence in the property and your confidence in bidding. It doesn't matter whether the data you gather is positive or negative - each piece of data reduces the amount of information upon which you must speculate.

The vast majority of residential foreclosures are held at the curb and bidders never have an opportunity to inspect the interior. If you are going to assume, for instance, that the boiler is gone, the kitchen is old fashioned and the property is in general disrepair, you would be wise to quantify your risk in terms of dollars and adjust your bid accordingly. That is precisely what most of your competing bidders will do.

If, however, you know beforehand that the property is in great shape (because you toured the property with the real estate agent that had it listed for sale, you met directly with the homeowner in the weeks before the auction, you spoke with neighbors who had recently been inside the property, etc.), you are in a position to be the high bidder without overbidding.

Conversely, if you discover that the basement is frequently flooded, the septic system failed Title V, or some sort of structural damage exists, you can wisely choose to pass on that property - or properly access your risk and bid according to your information.

Whether they are complete strangers or bidders whom you have met at other foreclosures, other registered bidders (and attendees who are not even registered to bid) are neither your friends nor your business advisors! In fact, just the opposite: Their interest in the property is in direct conflict with your interest.

This is not to say that casual comments regarding the property condition or other factors are necessarily false. However, you need to keep in mind that every registered bidder represents him or herself, and has an interest in seeing that the interests of others are diminished.

By the way (and in case you were considering this type of approach yourself), always remember that at some point, attempting to influence others or discourage interest in a property may amount to "chilling the sale." Activities that have this effect may be construed as interference with free trade and a violation of federal law.

As item #2 above recommends, do your own homework, and unless you know and trust the person you're talking to, ignore the comments of others when bidding at auction.

If you're already participating in auctions, you know how frustrating it can be to research a property, identify it as one in which you have a serious interest, and attend the auction, only to discover that the sale will be postponed to a future date.

Some of the causes of a foreclosure postponement include:

• The debtor has obtained a purchase contract on the property and the lender has agreed to put off the foreclosure, giving the debtor time to close the sale.

• The debtor has filed for bankruptcy protection, a process that automatically suspends any collection efforts (including foreclosure) until relief is obtained by the lender from the "automatic stay of execution."

• The debtor has made a good faith effort to cure the default and negotiated a forbearance agreement with the lender.

• An error or omission has occurred somewhere in the foreclosure process and the auction needs to be rescheduled.

• The lender has sold the note and mortgage.

There are other causes as well. The point here is simply that attendance at a foreclosure sale that had been rescheduled is almost always lower than what might have been the case on the originally published date. Lower attendance means that you can expect fewer bidders, less competition for the property and a potentially better price for you. (The downside with tracking postponements is that fairly frequently, a substantial portion of those foreclosures are never conducted and eventually canceled.)

There are many excellent buying opportunities available. If you have investigated ten or twenty foreclosure auctions and haven't seen the right one or found the deal you are looking for, don't be discouraged. Full time investors will often investigate hundreds of auctions, most of which they don't participate in or aren't the high bidder. The foreclosure marketplace is one that can yield significant results with less than a handful of successes in a year, so stay committed and keep at it.

In summary, foreclosure auctions are a terrific way to get involved in the real estate industry and earn a significant profit. And while the auction process itself can be complicated, keeping these five, critical guidelines in mind as you start down the path can have a considerable impact on your ultimate success.

Dale W. Schaetzke, CAI, AARE, GRI is president of Auction Marketing Group, Inc, a New England real estate auction specialist company based in Shrewsbury, MA. You can reach him at 508-842-1900 or by email at amg1000@cs.com.

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September 2006

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