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Internet auctions: pitfalls and potential

Some firms want to replace public sales of foreclosed properties with online bidding. Buyers may not know what they're getting into.

October 05, 2008|William Heisel | Times Staff Writer

As the nation prepares to pay the price for years of unfettered property speculation, a collection of online companies is hoping to cash in on an oncoming wave of foreclosure sales by auctioning distressed homes online -- with significant consequences for homeowners as well as purchasers.

Next month, Duval County in Florida will be the first in the country to hold an Internet foreclosure auction, forgoing the traditional courthouse sale in the hope of attracting buyers from other areas.

If the sales proceed and other states sign on, it will be an earth-shifting change in the way foreclosures are handled because it will eliminate a key requirement meant to protect homeowners from unscrupulous lenders.

By law in California -- and every other state save Florida -- lenders may not simply claim that a homeowner has defaulted on payments and move to take over the house. Instead, they must hold a public sale, in the county where the property is located, after notice has been provided to the borrower and the sale has been advertised.

Internet sales will also have important ramifications for bidders.

Because potential buyers may be out of the area, many won't be able to fully research the properties and might wind up, as happens even in courthouse sales, finding faucets with no running water, foundations that are crumbling and even the occasional corpse.

Moreover, housing experts worry that online bidders looking for a quick profit are precisely the kind of speculators that the troubled market doesn't need.

"When you make it easier and easier for people to gamble, you are going to have a tremendous number of people who think they have the smarts to do this and they are going to get nailed," said Ward Hanigan, the owner of Innovest Resource Management in San Diego, who buys foreclosed homes and trains bidders.

RealAuction, the company handling the Duval County sales, and its competitors hope to take the Internet model nationwide, including states like California with a large inventory of foreclosed homes. Right now, most of the properties sold online across the country already have been through public auctions and, unable to find buyers, have been taken over by their lenders.

"I would have to be fundamentally persuaded that it wouldn't compound existing problems in the housing market," said state Sen. Mark Ridley-Thomas (D-Los Angeles), chairman of the Business and Professions Committee and author of new legislation to help people refinance subprime loans.

U.S. foreclosure auctions date back to the 19th century and were created in the same spirit as public trials, to make sure that homeowners' rights were not violated by unscrupulous lenders in secret.

In most states, either a court, a county agency or a trustee runs the public sale before the property can be taken over by a lender. In California, private trustee firms appointed by title companies hold the auctions while recording every step of the process with the county clerk.

"With a public auction, if there is some chicanery going on between the trustee and lender, that won't be hidden," said Grant Nelson, a law professor at Pepperdine University who has written extensively about the auction process. "And if there are bidders who are colluding, that will be obvious too."

Some counties have sales every day. Usually a small group of regulars shows up after researching the properties and figuring out, often by paying a title company, whether there are any outstanding claims on the property, multiple mortgages, for example, or a divorce case that has tied things up. They typically bring a cashier's check for the maximum they are willing to pay that day.

The auctions move quickly. Dozens of homes can be auctioned in less than an hour. The auctioneer announces a property, and bidders shout out their bids, raising them in $100 increments. If they win, they have to pay the entire sales price, often within the next few minutes. That usually means signing over that cashier's check and collecting any change.

The old way: a shout out and a check

And if no one bids enough to satisfy the lender, the property ends up owned by the bank. There's a reason for the old-world way of doing things. First, the intensity of the fast-paced, in-person auction quickly weeds out amateurs. Bidders have to research the properties' histories, understand the local market and actually visit the homes.

Online auctions could create a new class of investor, seduced by the volume of information online but unaware of classic pitfalls, like the risk that the property has other claims on its title or abuts a toxic waste dump.

"There are things about the title that you just can't find on the Internet," said Bruce Norris, CEO of the Norris Group, a real estate investment firm in Riverside. "They can't tell you whether you're buying a first mortgage or a second mortgage. If you're buying a second, then you don't own the home free and clear."

Even experienced bidders can trip.

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