Recently there is a circus-like buzz around town about the auction that is rolling into town on December 15-16. Is it legitimate? Can I get a good deal? How does it work? These are the questions I am hearing over and over from interested parties. No one has asked yet about earnest money, what the contract looks like, what disclosures will be provided, and “what if I change my mind”?

How REDC came to Portland

Buena Vista Homes admittedly (see their press release) overbuilt inventory. Their innovative (his words, not mine) owner, Roger Pollock, philanthropist and apparently reformed bad boy, came up with the brilliant idea to unload his entire inventory by hiring REDC to hold an auction event. It initially sounded like a desperate move until I dug a little deeper.

About REDC

REDC, or Real Estate Disposition Corporation specializes in auctioning off distressed properties, typically owned by banks. Operating under the names of http://www.landauction.com/ , http://www.nationalrecreationalproperties.com/ and http://www.ushomeauction.com/ , the company has come under scrutiny in the past and just googling any of those business names will bring up a plethora of very good PR work on their part and many discussions involving buyers that feel they have been taken advantage of.

Reading through anecdotal accounts in discussions online, many participants called it a scam, and nothing more than a carnival road show out to make a buck from unsuspecting and naïve marks. Buyers are made all the more uninformed by the fact that the sales agreement, individual property disclosures and the builder’s warranty were not readily available either at the website http://www.auctiontoday.com/ or by calling the toll free number. I am sure homes do sell at these events, but not at the tremendous savings they advertise. They have been alive and well in California for some time, and John Ta has done a great job of following the auctions there.

What I Found

1. You must have all of your inspections completed prior to bidding. This includes home inspections, surveys, geological inspections, etc., whether you are the winning bid or not. The sales are “as-is”. (Called toll free number to verify)
2. If you bring your own financing, and that financing fails, then you forfeit your earnest money, which is a minimum of $5000 or 3% of the sales price, whichever is greater. It should be noted that 3% earnest money is advertised on the website, but 5% is stated in the Terms & Conditions. If you purchase more than one property, each subsequent property requires 15% or $10,000, whichever is greater, earnest money. (Terms & Conditions, Called toll free number to verify)
3. If you use their financing, and it fails, there is no guarantee that your earnest money will be refunded (Read the Terms & Conditions). This may be addressed in the Sale Agreement, which is not yet available for review. One anecdotal account I read online, stated that they will extend closing over and over again, until you back out, forfeiting your earnest money. 11/30 - Please see comments by Deric Schoof below.
4. It appears one of the only ways to retain your earnest money is if the seller rejects your bid. The seller has 7 days to do so.
5. The Builder’s Warranty, the Sale Agreement, and the individual property disclosures were not yet available, but were expected to be available sometime before the auction takes place. No specific date was known at this time, but a request was being put in to a supervisor. (Conversation with toll free operator). I did find paperwork for properties in other states, but no sale agreement or individual property disclosures, mostly condominium bylaws and the like. 11/27 - See update below.
6. The broker’s 2% commission is not the buyer’s obligation. It will not be an additional cost to your buyer.
7. A 5% Buyer’s Premium will be added to the final bid price. (See Terms & Conditions)
8. In a letter sent to recent purchasers of Buena Vista homes, Roger Pollock states that he expects the auctioned homes’ selling price to be “inline with the market”. Pollock also explains the auction as nothing more than an aggressive marketing campaign.
9. In a 3 page press release about the auction, Pollock says that “buyers are going to get amazing deals”.
10. The Terms & Conditions plainly state that there is an undisclosed reserve price on each home. The advertised minimum bid is not necessarily the reserve price. BVH can set a reserve price, or a minimum price without telling bidders what that price is.
11. There is no law against “fixing” an auction. In other words, your buyer could be bidding against others who work for the auction, driving the price up. If you know otherwise, please let me know.
12. REDC, the company organizing the auction, is also operating under the name USHomeAuction.com, auctioning foreclosed properties, LandAuction.com, auctioning land, and National Recreation Properties, selling recreational properties through infomercials with Erik Estrada and Chuck Woolery. None have good reputations, as buyers did not fully understand the process or paperwork. Google all three business names, you’ll see what I’m talking about. Although you will have to click pages 2, 3, 4, etc., to wade through their PR work.

The Short Version

BUYER BEWARE! If it sounds too good to be true, it probably is. Know going in that you are most likely handing them 3%(or is it 5%?) of the sales price, or a minimum of $5000, with no hope of seeing it again. $350,000 price tag = $10,500 in earnest money. Ouch.

The overall savings I was seeing in reported sales of REDC’s foreclosure auctions in other states was a rough average of 20%. I could not find any recent history of REDC auctions in our state. In our current market conditions, buyers can most likely get close to this in a traditional transaction. Even if you save 10%, it will be worth the extra 10% to retain your rights in the sale agreement.

If you are still interested in pursuing an auction property, please perform your due diligence, having any inspections done prior to bidding. Call their lender and get pre-qualified so that you fully understand all of their rates and fees. If the Sale Agreement becomes available for review in advance, please have your attorney review it and fully understand your obligations.

To Answer Those Questions

Is it legitimate? Yes, they are abiding by the law, although I question their ethics. My feeling is that the disgruntled buyers did not read the fine
print or if they did, they did not fully understand what they were reading and signing. REDC has made their process and terms readily available, for the most part, although they retain the right to change the terms, conditions, and sale agreement upon announcement at the auction, even during the auction.

Can I get a good deal? Maybe, but if you do it could be at a tremendous cost if you do not perform your due diligence ahead of time. Being part of the real estate community, I hear the chit chat that floats around. My professional advice regarding this particular builder would be to have a home inspection done ($300+), order a preliminary title report ($200+), as well as a geological evaluation ($???), and a site survey ($400+) to verify lot lines. Not to mention any additional inspections these reports may suggest, like a sewer scope ($100). Whatever issues you uncover will be your problem. All sales are as-is. If you do not, and you eventually resell the property, you could potentially be made aware of very costly issues that you will then have to deal with to sell the property.

How does it work? I think I’ve explained that sufficiently enough, but you can visit their website, http://www.auctiontoday.com/ , to read their explanation of how it works.

Print this article HERE.

UPDATE 11/28:

I did find a sample sale agreement and auction addendum for an upcoming auction in California. As suspected, the buyer signs away all the normal contingencies. They use a standard CA form, but line out any and all buyer contingencies. There is no inspection period after entering into the agreement, no backing out due to financing, unless you use their lender, and still it has to be “no fault of the buyer”, like the property didn’t appraise. You will be responsible for liquidated damages, which of course would be your earnest money. Meanwhile they leave every option for the seller to cancel the transaction. Even if you do use your own financing, you agree to allow their lender to run your credit and share that information with the seller.

Oregon forms are different in the details, but essentially offer all the same contingencies the standard California forms do. When we are provided with the Oregon paperwork I will link for your review.

Also, after much discussion, my interested, and now informed, buyers have chosen not to take part.

UPDATE 12/1:

REDC has started posting preliminary title reports on some, but not all, of the individual property listings. They are dated 11/5/07, ten days prior to BVH’s press release. These reports state that BVH still owes $500+ in 2006-2007 taxes, on each report that I read. This outdated report does not address any liens that may have been placed on the property since the press release, say a lien that a subcontractor or supplier might be prompted to file. Normally, all liens have to be cleared before escrow can close, so there may be no cause for alarm, but please be sure that you read the new preliminary title report that should be supplied once escrow is opened, and if there are liens be sure you have written proof they were cleared upon closing of escrow.

UPDATE 12/8:

HOA Documents, Builder’s Maintence Guide, more Preliminary Title Reports, and some other documents are being added to listings at the auction website, but still no sale agreement or auction addendums. I will say, though, that I did not check all 200+ listings. READ all documents carefully.

Just a word, too, about individual property disclosures. If you have ever sold a house, it’s that pesky, poorly written form that asks about every nook and cranny of your home. Being new construction, these homes are exempt from this disclosure, although the form is still required to be presented with the proper exclusion noted and acknowledged by all parties. The form actually reads “This is the first sale of a home never occupied”; some of the auction homes are currently rented, thus occupied, so I would expect that a property disclosure would be required.

Also, earlier this week The Oregonian did a quick write up regarding the auction and reserve pricing. I’m certainly glad that they are willing to help shed some light on this auction, although I don’t think it is very accurate to compare this auction to an E-Bay auction, or a car purchase. A home purchase is the single largest purchase and investment that most people make in their lifetime, and without the proper due diligence can have disasterous effects on finances, future security, and long term personal well being. We all expect to “lose out” occasionally on an E-Bay purchase, or even a car or larger retail purchase, but those poor decisions or “lemons” don’t have nearly the disasterous effects that rushing into a home purchase could have. Most people can’t afford the risk of moving into a lemon of a house, and without following due dilligence guidelines a home buyer could be at a tremendous risk for loss. And don’t forget, homeownership comes with tax benefits and consequences that could possibly come into play when trying to bail out of a bad situation.

It should also be brought up that traditionally home auctions usually involve foreclosed or distressed properties and attract mostly investors, who are more experience and savvy. My gravest concern with a new construction auction is that it most likely attracts homeowners that intend to make the new purchase their personal residence, and don’t typically have the means to bail themselves out of a lemon purchase, as most serious investors do.

And Another Thing….

The advertised 3-5% “down payment” is really nagging at me, and no one is really talking about it. It reads as earnest money in the Terms & Conditions, which goes towards your final purchase. It’s my understanding that Countrywide is not offering any second mortgages, and no non-owner occupied financing at all. The majority of banks, in our current market, are not offering loans for more than 80% of the purchase price. If they are, those loans are difficult to qualify for, and are typically at a higher interest rate. Plus, many of these home will end up falling into the jumbo loan category, again, a more difficult qualification, and can get expensive. I strongly urge anyone considering purchasing through the auction to call Countrywide and get pre-qualified. PLEASE completely understand your financing before you go to the auction.

Update 12/10:

Sale agreements and related addendums have been posted on the the auction website. Funny, though, they have added them in such a way that they cannot be linked, and for fear of copyright enfringement I chose not to link them through my own website. But you can find them if you go their site, click on a property to go to that property’s individual page, and then near the top of the right column there is a drop down list labeled “Legal Disclosure Documents”. Click on it, and a list will appear. Click the appropriate document.

So, as in the California auctions, they took our standard Oregon forms and either lined out or wrote out all of the buyer’s contingencies. The exceptions are if you use their financing and fail to qualify, and if you are buying an occupied home you are allowed 7 days to obtain inspections and cancel the sale if you choose. This is not an uncommon practice even in traditional transactions involving tenant occupied properties. But these sale agreements are always written “subject to interior inspection”, and still include an inspection period to perform due dilligence. Canceling the transaction under these two exceptions is the only way to retain your earnest money.

If you are paying cash, or using outside financing (not Countrywide), and you cancel the transaction for any reason, you are out your earnest money, wh
ich is 3% of purchase price or $5000 whichever is greater.

Items of note on the addendum are the closing date of January 18th, a long list of terms and disclosures (please read), and the final walk through one week prior to closing. The list of terms and disclosures I suspect was taken straight from BV’s sale agreement (most builders draft their own), and I didn’t see anything overly alarming. Consider the walk through mandatory, or BV will not address any punch list items. Something else I find interesting is that they are stating that the homes will be ready for occupany by close of escrow. Up at Carson Crest many of the auction homes are still unfinished, and currently being worked on. Also, in regards to the builder’s warranty, you have two pre-determined opportunities to address warranty issues. If you miss those opportunities, you’re out of luck.

Please feel free to leave comments or ask questions.

Opinions expressed in this article are the opinions of author, and not to necessarily the opinions of Meadows Group Inc.
All rights reserved on all original content, non-original content is given credit | Michelle Berry | 2009