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What Auction Bargains?

Bidding on this five-bedroom brick Colonial in Bowie started at $289,000. The gavel came down at $530,000.
Bidding on this five-bedroom brick Colonial in Bowie started at $289,000. The gavel came down at $530,000. (By Elizabeth Razzi -- The Washington Post)
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By Elizabeth Razzi
Sunday, March 16, 2008

I sat in on a cattle auction in Kansas City once, and I've attended an antiques auction on Manhattan's Upper East Side. Except for the scent of manure or Chanel No. 5 at those events, neither was substantially different from last weekend's foreclosure auction at the Walter E. Washington Convention Center.

Auction "assistants," ostensibly there to help people bid, wore tuxedos, bow ties and black Air Jordans. Arms flailing and voices whooping, they whipped up the crowd much the same as the cowboys cracking whips stirred up excitement in Kansas City. The auctioneer prattled on like Porky Pig calling the Kentucky Derby.

Given the bulging inventory of foreclosed properties that banks need to unload, an auction seems like an efficient, fair way to move the goods fast. And a rational buyer, cash in pocket and ready to commit to a no-contingencies sales contract on the spot, would only sit through such hoopla because he expects a bargain. But what I saw at the foreclosure auction left me skeptical about the availability of auction bargains. Sellers, the banks that own the foreclosures, seem to be unduly optimistic about the prices they can get for foreclosures, which are, after all, damaged goods

Over the two-day auction, Real Estate Disposition Corp., an auction company based in California, pushed hundreds of Washington area houses, townhouses and condo apartments that "Must Be Sold!"

The weekend before, I took advantage of an open house to check out one of those homes, an attractive five-bedroom, four-bathroom brick Colonial in Bowie. The REDC brochure said, without elaboration, that it was "previously valued" at $780,000.

The homes to be auctioned could be visited during these open houses on the two weekends before the auction. All auction sales are as-is, with no opportunity to inspect the home after bidding, so these open houses provided the only chance for bidders to evaluate the goods.

The vacant house appeared to be in good condition, though it was impossible to try out the heat, plumbing or appliances because utilities had been shut off for the winter. There were large holes in one wall of the basement where a home theater had been removed. The house is in a pleasant neighborhood, where an ice-cream truck made its rounds in late afternoon.

Maryland tax records show the home's full assessed value at $531,450, and that the developer had sold it in 2004 for $460,000. At last week's auction, bidding started at $289,000 and the gavel slammed down at $530,000. Add the 5 percent buyer's premium owed on all sales that day, and the buyer will owe $556,500.

You be the judge of whether that's a great deal. In the same neighborhood, two other five-bedroom homes, which are not foreclosures, are listed for sale at $645,000 and $650,000.

Those asking prices are still subject to negotiation, of course. Buyers will likely expect seller-paid closing costs or other incentives. And the true condition of the auctioned home's appliances and utilities is still a wild card.

It's impossible to know how many of the hundreds of homes auctioned last weekend will go to closing. The banks that own the homes set undisclosed reserve prices for each property.

Reserve prices are common at auctions; they protect sellers from fluke sales at ridiculous prices. But at other auctions I have attended, the auctioneer announced when bidding has met the reserve. Bidders then know the sale is really going to happen, and bidding often intensifies. But last week, even after the slam of the gavel, no one knew if the reserve had been met. And lenders still had 14 days to reject any of the deals.

Evidently the lenders selling homes at this auction don't want to reveal their bottom line in case they decide to list the home for sale in the multiple-listing service after a failed attempt at auction. But why would a bank think it could get a better deal later if hundreds of would-be buyers, each with a cashier's check for $5,000 in his pocket, didn't see fit to offer more? With so many homes on the market now, buyers want a bargain on all foreclosures, especially those sold at auction.

Lenders seem to be in denial, but they are not in a position to hold out for higher prices. They're reluctant deal-makers, whether it's on foreclosures or on short sales, in which the lender agrees to accept less than the full amount owed on the mortgage. A short sale allows a struggling borrower to get rid of a home that's worth less than he owes -- and keep one more foreclosure from adding to the glut.

In a recent speech to a bankers convention in Florida, Federal Reserve Chairman Ben S. Bernanke said lenders were losing more than 50 percent of the mortgage amount owed when they foreclosed on subprime mortgages late last year.

Because of overstocked markets, the time it takes lenders to sell foreclosures is likely to drag out even longer, increasing those losses. He recommended that lenders work harder to keep struggling borrowers in their homes, perhaps even agreeing to write off part of the amount owed so it's more in line with the home's current market value. In return for such a break today, lenders might share in the appreciation of those properties later -- a reasonable idea.

The message is clear: Letting a home go to foreclosure won't save the lender money. And letting the foreclosure linger on a glutted market isn't going to sweeten the bottom line. The market can't recover until these foreclosed homes -- think of them as damaged goods, remnants, or over-stocks -- get cleared out of the inventory.

Buyers are interested in foreclosures, but with all the other well-tended inventory on the market, the only reason they're interested is because they want a discount.

You don't have to sit through an auction to find a foreclosure deal. Banks often list these homes for sale with real estate agents, and any agent can help you search for them on the multiple-listing service. You might even find homes that failed to sell at auction.

Long & Foster recently launched a Web site dedicated to searching for foreclosed homes listed for sale with local real estate brokerages. http://Foreclosures.longandfoster.com has about 2,500 listings searchable by Zip code, neighborhood or number of bedrooms . Some of their offices have started organizing bus tours of foreclosure listings.

Bring your own Red Bull if you crave excitement, and negotiate on your own terms, not those of the auction house.

E-mail Elizabeth Razzi atrazzie@washpost.com.

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