Navigating Auctions: Auto, Real Estate Foreclosures, and "Ugly" Houses Predatory Practices

Auctions may seem like an easier way to get your dream home or car. They offer the chance to buy a big-ticket item well below its market value.

But claims like “seized cars from $500" and “foreclosed homes from $10,000" are more complicated and riskier than they often appear.

This article details what to know about real estate foreclosures and automotive auctions. You'll learn legal tips for the auction process, how to protect yourself from predatory practices, and what to know about companies offering cash for “ugly" houses.

How Exactly Does an Auction Work?

Auctions are in-person or online public sales often used to sell vehicles and real estate, especially foreclosed homes.

An automotive auction is a platform for sellers to sell vehicles. Sellers can be private owners, dealerships, and government agencies. Potential buyers can bid on the cars they're interested in, with the highest bidder winning the vehicle.

Property sale auctions have a similar process. When a homeowner defaults on their mortgage payments, the lending institution may repossess the property. The lending institution is typically a bank, mortgage lender, or government-sponsored enterprise. The repossessed or foreclosed home is often sold at an auction with the purpose of recouping the lender's money. These auctions are usually public and can attract buyers looking for homes priced well below market value.

While it offers the potential to purchase vehicles or real estate at lower prices, the auction process also comes with risks. For example, auctioned properties and vehicles are often sold "as-is." This means you must purchase the item in its current condition with no guarantees or warranties from the seller. With some auctioned homes, this may also mean you can't inspect the property or even see the interior.

Contract laws and consumer protection laws cover some aspects of the auction process. Both buyers and sellers should understand the legal considerations involved. This helps ensure the process is compliant with the law.

For example, some jurisdictions have laws protecting consumers from deceptive trading practices, like shill bidding (making fake bids to drive up the price) or misleading descriptions of items.

What Is an Auction House?

An auction house is a company that facilitates the sale of goods or property through auctions. They host both physical and online auctions. Auction houses handle a wide range of items, including:

• Artwork and antiques
• Vehicles
• Real estate
• Commercial and industrial equipment

If working with an auction house, first ensure it is reputable. Look for a record of successful sales and satisfied customers. It also helps to work with an auction house with expertise in the items for sale. This helps ensure accurate valuations and descriptions.

Sealed Bid Auction vs. Open Bid Auction

The bidding process depends on the type of auction. The primary difference between sealed bid auctions and open bid auctions is the visibility of the bids.

In a sealed bid auction, all bidders submit their bids confidentially. No bidder knows what the other participants have offered. Bids are placed in sealed envelopes and are only opened by the auctioneer at a predetermined time. Once the auctioneer or agent opens all the bids, the highest number is usually declared the winning bidder.

Sealed bid auctions are often used when the seller prefers privacy. Or they're used to prevent bid amounts from influencing other bidders. This type of auction is also commonly used for certain government contracts and real estate sales.

Conversely, an open bid auction (sometimes called an English auction) is public. Bidders make their bids openly and sometimes audibly. Bidders can see the progression of bids, and each following bid must be higher than the previous one.

This type of auction allows for competitive bidding, or “bidding wars" where potential buyers counter the bids of others. This often leads to higher final selling prices.

Open bid auctions are commonly used for artwork, some real estate properties, and classic cars.

Auto Auctions

Despite what you might hear about or see in auction ads, cars at auction typically sell for their fair market value. These auctions attract various buyers, including used car dealers, so the bidding can get competitive.

Vehicles at auction are often lender repossessions due to payment default. Some retired rental cars are also sold at auction.

At many government sales, the items are appraised before the sale and sold only if bidding runs high. It's rare to find high-end or late-model vehicles for sale, especially at bargain prices. Vehicles that sell for $500 or less are usually damaged or junk vehicles purchased for scrap.

Real Estate Auctions and Foreclosed Homes

Because lenders want to recover the outstanding mortgage balance quickly, foreclosed homes are often priced lower than comparable properties on the market. Lower price points can also provide a real estate investment opportunity. Homebuyers may gain significant equity after making repairs and home improvements.

But foreclosed homes also have disadvantages that potential buyers should be aware of before purchasing at an auction.

Most well-maintained homes sell for close to their appraised value. Houses selling for significantly less often need repairs. Or they don't meet current building codes. A home in significant disrepair may not even be safe to live in. In some cases, you may need to take out a home improvement loan.

Foreclosed homes are sold "as is." They don't come with warranties, and sellers aren't required to disclose any problems. Buyers, particularly those who don't pay for a professional home inspection before closing on the deal, may find themselves mired in unanticipated repair bills.

Sometimes, foreclosed homes are still occupied by the previous owners or tenants. The new owner is responsible for the eviction process, which can be lengthy and costly.

Not all auctioned homes are foreclosures. Homes are often seized for defaulting on property taxes as well.

The Importance of the Legal Pack

If bidding on a foreclosed home, it's imperative to review the “legal pack" before the auction carefully. The legal pack refers to the legal documents for the home. It typically includes:

• Title and property deeds
• Special conditions of sale
• Land registry or property registration documents
• Search results
• Property information form
• Fixtures and fittings form
• Tenant lease (if applicable)

The seller or the auction house typically prepares the legal pack and makes it available to prospective buyers before the auction. Consider having your attorney review these documents to identify any potential issues.

Understanding the Guide Price

A “guide price" is an estimate of the likely sale price range for the property at auction. It is usually represented as a range, like $300,000 - $330,000. The auction house or real estate agent uses the property's valuation and seller expectations to set the guide price.

The guide price gives potential buyers an idea of what the property might sell for. You can use it to determine if the property is within your budget and, if so, what you should bid.

Bidding competition can lead to an actual sale price that is higher than the guide price.

Some auctions also use a reserve price, which is the lowest price the seller is willing to accept. If the reserve price isn't met, the seller can walk away. Some auctions disclose the reserve price, while others only indicate during the bidding process if it's met or unmet.

To drum up excitement, the opening bid (which starts the bidding process) is often set lower than the reserve price.

Beware of Auction Guides for Purchase

Sometimes, companies (usually consultancy firms or auction houses) try to sell auction guides. These guides typically include details about items that will be on sale at an auction in your area. But you can find most information about auctions online or elsewhere for free or at a much lower cost.

Companies that sell auction guides aren't necessarily privy to information that isn't available to the public. Most often, the information in these guides isn't proprietary and is on other platforms, including:

• Directly from government agencies that notify subscribers of upcoming sales (this sometimes involves a subscription fee)
• Online through the Multiple Listing Service (MLS), a database used by real estate agents (specific to foreclosure auctions)
• The classified or business sections of national or local newspapers
• Trade papers like RealtyTrac, Auto Remarketing, and Automotive News
• Your local library or chamber of commerce

Some government sales programs also advertise upcoming auctions. You may see notices posted at post offices, town halls, and other government buildings. You can often find information on these websites:

• U.S. Department of Housing and Urban Development
• U.S. Department of the Treasury
• U.S. Marshals Service
• General Services Administration
• Freddie Mac Homes

Companies Offering Cash for “Ugly" Houses

Some real estate investors specialize in offering quick cash sales for homes. Typically, these investors or companies target “ugly" properties, or those in need of repair or at risk of foreclosure. They aim to buy low, renovate, and then sell at a higher price. Buyers treat these homes as investment properties.

This can provide a swift option for homeowners who need to sell quickly or don't have the funds to repair their property before selling.

It's key to be aware of predatory, high-pressure sales tactics in this industry. For example, some companies offering to buy "ugly" houses may intentionally seek out homeowners going through a divorce or job loss or entering a nursing home.

While this isn't technically illegal, some argue it's unethical and bad business. But the law steps in if a homeowner signs a sales contract under duress or if they aren't mentally competent. In these cases, the home sale contract could be unenforceable under the law.

Protecting Yourself From Predatory Practices and Scams

Being well-informed helps protect you from potential scams. It can also help ensure any sale transaction you enter into is legitimate, fair, and legal. Check out the following tips:

• Recognize that seized vehicles are often sold at government auctions but rarely at the bargain prices quoted in some ads. Expect to pay what the vehicle is worth and compete against other bidders, including used car dealers.
• Be aware that foreclosed homes often only sell for slightly less than their appraised valuation—but may require substantial repairs.
• If you decide to purchase an auction guide, research the company on the Better Business Bureau (BBB) or state Attorney General before you buy. Also, use your credit card to pay—credit cards offer more protection if you have a problem with the purchase.
• Check the licensing of any professionals you work with, including auctioneers, real estate agents, and dealers.
• Report suspected scams to the appropriate authorities. This is usually your state's attorney general's office, the Federal Trade Commission (FTC), or the Consumer Financial Protection Bureau (CFPB).
• Review the terms and conditions of the auction sale carefully. Make sure you fully understand the payment process, delivery, warranties, and any buyer's fees or additional costs.
• Verify that the vehicle or property has a clear title. For vehicles, obtain a vehicle history report. For homes, consider a title search to uncover any liens or legal issues.
• Secure your financing before the auction, preferably with a reputable lender. This minimizes the need for on-the-spot financing, which often comes with unfavorable terms.
• Be wary of high-pressure sales tactics or unsolicited offers to help you avoid foreclosure.

Get Legal Help for an Auction Issue

Sometimes, winning bids go wrong. Buying a vehicle or house at auction can involve significant financial investment and potential legal issues. Some consumers get help from an attorney to mitigate risk and protect their interests throughout this process.

A knowledgeable attorney can perform due diligence to ensure the absence of liens or title issues, negotiate sale terms, review contracts, and much more. They can also help resolve a dispute if you've been subject to fraud or non-delivery. Or they can help if you've signed a contract under duress.

If you need help or have an issue with an auto or real estate property auction, contact a local consumer protection attorney to learn how they can support you.