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."
