Although it is possible to get a very good deal on a condo at auction, understand that you are taking risks.
A developer doesn’t turn to an auction unless more traditional sales methods haven’t worked. As sales slow–or perhaps never catch fire in the first place–builders often cut corners any way they can, perhaps by hastily finishing amenities or using lower-grade materials. They may stop paying subcontractors, not fund reserves adequately or otherwise stop living up to financial obligations; cut back on maintenance of common areas like lobbies and pools; and skimp on landscaping and pest control. Such penny-pinching can cause problems for new owners.
Because the builder is ready to cut his losses and move on, he isn’t going to offer you any of the goodies you can expect in a regular sale, like upgraded appliance packages and financing help. In fact, unless the auction house has made prior arrangements with a mortgage company, you may find it difficult to get financing, especially if the seller doesn’t allow inspections before the sale. (Indeed, before you bid at any real-estate auction, you should read the rules carefully to see if you’ll lose your deposit or be responsible for other expenses if you don’t have a pre-approval letter from a lender.)
If you’re still game to buy this way, prepare yourself before the auction by researching current sales in the development, as well as comparable sales nearby. Set a firm upper limit so you don’t overbid. Factor in any “buyer’s premium” that you’ll owe the auction house—usually 5% to 10% of the winning bid. Make sure you have enough cash on hand to pay a deposit, which could be up to 10% of the home’s estimated value, as well as closing costs, since closings typically happen within a month after the auction occurs. And check to see if any new home warranties offered by the developer apply to the auctioned units; if not, you should purchase your own warranty policy.
You should also pay attention to how the property is being sold. “Reserve” sales mean that the seller can accept or reject high bids within a certain time after the auction; they’re usually used for the most attractive properties in the most desirable neighborhoods. “Minimum-bid” sales mean that the units are guaranteed to be sold if the bidding reaches or goes over a certain advertised price; condo developers often use this method in partially sold out buildings to keep prices from falling below a level that would upset existing owners. Meanwhile, “absolute” auctions guarantee that units will be sold to the highest bidders regardless of price.
While bidders inevitably find the possibility of getting a steal enticing, keep in mind that an absolute auction is a sure sign that sales so far have been scarce and the seller is desperate.
Wall Street Journal, Nov. 23, 2010
