Auction for Ladera Ranch: A foreclosure bidding war with a twist

What really happens at foreclosure auctions? I've posted an latimes.com video and a photo gallery that take you inside the foreclosure auction staged last week by DoveBid and Catalist Homes at the Fairplex in Pomona.

We focused on the bidding for the Orange County house at left: 3 Magnolia Drive in Ladera Ranch, probably the nicest house of the 75 homes that went up for auction. Four bedrooms, 3 bathrooms, it sold for $1.2 million in 2005, but in this market was put up for auction with a scheduled opening bid of just $429,000. Because the opening bid was so low, there was a spirited bidding war for the home.

I'd like to think the video is worth watching for the surprise ending -- which itself is an education in how foreclosure auctions work. Those of you who can't wait can click below and I'll explain what happened.

Here's what happened: The winning bid for this home came in at $705,000. Remember, the bidder agrees to pay an additional 5% premium to the auction companies. So the total bid was $740,000 -- a 38% discount from the peak sales price of $1.2 million. However, the bank or lender that owns the home reserves the right to reject the high bid as too low, and that is what happened here.

Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Don Kelsen, L.A. Times

Comments

[1]

Watched the video. Thanks Peter, you sounded good.

For the auction, I only ask "What's the point"? Might as well just write a standard offer. After seeing this, I think anyone would be a fool to waste their time at one of these auctions. Almost seems unethical somehow.

Isn’t listing a home and vetting offers a defacto auction, with the realtors as the auctioneers?

[GDC]

The bank gets to reject the high bid? What kinda crap is that? It gets to see what the highest price is, then it has the option to not go through with it?

Then they should allow the highest bidder to back out once they see what the highest bid ends up to be. What a waste of time.

[Laker]

I will bet $100, that this house will sell in a month or 6 months from today for LESS than $740,000.

In these auctions, people are overbidding and hence paying paying more than a regular joe will offer on a MLS listing with a sign in front of the house. This bank is greeeeeedy, and because of that will get less than was was offered to him here.
Like the old saying: It is better to have one bird in your hand rather than 5 on the tree... or in the bank's case, it is better to have a customer that is willing to pay $740,000 than have a wild wet dream about selling this house to a sucker for $1,200,000....

[Scott Ayres]

how much owed on the property?

[l.a.guy]

Nice work Peter. You saved me the trouble of going to a foreclosure auction to satisfy my curiosity.

Do you happen to know what percentage of the winning bids at these auctions are accepted by the banks? The whole exercise seems pretty pointless if the bank is just going to say no. Why not set the opening bid to their bottom line number? If no one bids at least that much then there's no point in declaring a winner.

[tarbubble]

the bank is being very foolish. Ladera Ranch is a neighborhood in trouble - oversized houses mostly built during the bubble and with very high HOA fees. the recent defeat of the 241 toll road extension is also a blow against LR. i would not be surprised to ultimately see prices there fall to the level the bank was rejecting.

[arturo basulto]

banks more than anyone now the true value of a home because they hire appraisers to do there sales value of a home prior to selling it. and normally. also get additional help from realtors that sell in the area to get a opinion. so guess who nows more?

[Hula Girl]

Of course the bank is holding out - if nothing else, the Fed will buy it for whatever price the bank says it's worth.

Today, bail-out Bear Stearns, tomorrow, buy up all the REOs.

BTW: Who's the lender?

(Great story PV, thanks.)

[Inland Empire]

If you think this auction is crap, look at some of the other things going on. Short sales - the banks do the same thing more or less as the auction. You can wait forever for an answer on those with the same result. There are agents out there with houses supposedly "for sale" that will stand in a prospective buyers way so that their buds can get the house. Lots of switchy-changy-my-hands-never-leave-my
wrist crap going on. The best houses disapear faster than they would in a "normal" market.
Besides truth in lending, there should be truth in real estate deals.

[sunsetbeachguy]

These types of Auctions are stupid for real buyers to attend.

If you read the terms and conditions of attending, shill bids are allowed, undisclosed reserve prices are allowed and the extra 5% on top of the bid is really stupid.

[tew]

Peter,

If you can use your contacts to find out how the banks mark the REO on their books, that could add some valuable information about the banks' behaviors. For instance, does the bank with the above discussed property have it on their books at $1MM? Are they required to write it down to the highest big even if they reject it or by rejecting it are they delaying reality recognition on their books???

[Rob]

Nice work Peter. Very professional.

[toby]

LOL they are going to regret that. I can just hear it "In 2008 we turning down 3 quarters of a million dollars right and left...NOW we would be lucky to get 500,000."

[mbob]

We are still early stage.

Late stage will be, as they say, another story.

[Steve]

Peter great video and I feel for these poor people, the time, emotional stress, risk all wasted when the lender rejects the bid. I used to live in this area in OC and this dump is over priced and the area over rated. You want to avoid this nightmare that the lender puts you through, move to CO. For $740K in CO you will get a new 4000 sq ft home with a huge lot on a golf course and the builder will be so happpy you showed up, the upgrades and financing are free. I just don't get it, I was a CA native whom lived in this dump and why do people stay and put up with this abuse.

[Kiwano]

I took a look at Ladera Ranch listings on the new MRMLS and found 287 homes for sale, 18 lots for sale and 57 homes available for lease. Those numbers seem rather large for such a community of around 20,000 residents.

[RSM]

We actually went to view this house, it needs a bit of work. There is a hole in the master bath, the rooms are on the small side, and the carpet needs to be replaced throughout. You can find much better, in Ladera, for the price it went for at auction.

[gc67]

I hope the winning bidders REJECT the greedy lender's suggestion that they submit a higher bid because 6 months from now $705K is going to look REAL GOOD for that house.

[jdj]

The banks are waiting to see what the government bailout is going to be before they are willing to take the write-downs. If they can unload these overpriced houses on a new govt agency or the FHA/GSEs they figure it is worth the wait.

It is really unfortunate that the expectations of bailouts has kept a false bottom under prices.

[Peter C]

I realize that houses and personal knick-knacks are not the same thing, but I think a comparison to eBay might be illustrative. If I am a selling an item on eBay, I am not allowed to let the bidding (read free market forces) play out, and at the conclusion decide that I don't want to follow-thru on the transaction because I'm unhappy with the final bidding price. A bidder can leave negative feedback for that scenario, and I think it's deserved.

Back to houses. Agree with the other posters that by rejecting the bid, the bank is holding out for a higher bid. What kind of nonsense is that? Prices are likely to be lower tihs summer, and heaven only knows what kind of (lower) bid they'll get the next time the house goes up for auction.

[Mousebender]

Kudos to sunsetbeachguy.

Check DoveBid's terms at this link:

http://www.dovebid.com/Auctions/
AuctionDetail.asp?auctionID=11372

in the Sale-Specific Terms & Conditions section.

"The Auctioneer may further bid on behalf of the Seller, up to the amount of the Reserve Price, by placing successive or consecutive bids for a Property, or by placing bids in response to other bidders. "

This is not an opportunity for prospective owners to buy. This is a license for auction houses to steal from unknowing bidders. We're truly in the Wild West now.

[desmo]

banks more than anyone now the true value of a home because they hire appraisers to do there sales value of a home prior to selling it. and normally. also get additional help from realtors that sell in the area to get a opinion. so guess who nows more?

lol, appraisers, realtors & the banks nows more? Then why Art, is there an auction in the first place?

[Raul]

It is not "location". it is "timing, timing, timing" and right now is not the time to buy, it does not matter how good it looks right now, it will look bad later, we all know that, except a few guys, they are the ones going to those auctions. Joseph was mentioning the lack of Home owners in the market..... Most of them do not need to sell, and the ones that need to sell, owe more than what they can get for it, those houses will be owned by the Banks in a relative short time. A lot of them are not walking away because they fell shame.....What their friends are going to think?. Now the Banks are not selling because the "nominal" price of those houses are in their books, and remember "leverage" if they get rid of those houses for less, every one would realize they do not own anything, their stock value would go down. Their hope is we the taxpayers will buy those assets at the "nominal" value, then they will be OK. But it does not matter who owns those properties, eventually their price will go down, then will be the time to buy...

[Keith]

Times are not hard enough for these to be real auctions, these are more of just staged sales conventions. Banks know that right now the auction format is just a way to get a bunch of people to come look at their houses for sale. It's a bunch of phony baloney, real auctions are still a couple of years away probably.

[caliguy2699]

"Ladera Ranch is a neighborhood in trouble - oversized houses mostly built during the bubble and with very high HOA fees"

Bingo. Lot of speculation and risky loans there as well. It's unfortunate because it's a nice family-friendly community, but checking out the listings it looks like half the area is for sale. The commute from Ladera to most job centers in OC is very, very bad.

The HOA fees, as mentioned before, are high and run around $400 per month for this place. And, the mello roos alone on the Magnolia property are $3,013.66 per year, or about $250 per month - this is from the OC treasurer/tax collector site.

[MyLessThanPrimeBeef]

Here is another interesting auction for your vultures.

'Flying Saucer House' to be auctioned in Tennessee.

http://www.foxnews.com/story/0,2933,337790,00.html

All you nostalgic aliens, don't miss the opportunity!! Opening bid: $100,000, which is cheap if you have a lot of UAE dirham.

[mbob]

...reminds me of the term "show trial" that usually is used with the words "North Korea" or "Red China" or "Kremlin."

These are not legitimate auctions, just test runs.

[ArmyVet]

Interesting situation. Who authorized the auction? Was this an auction of a property the bank previously foreclosed on, or a property being auctioned as an alternative to foreclosure? The way the article is written it was, n essence, the auction is a conditional sale of the property.

If the bank did not already take title, such as in a prior foreclosure sale, this "auction" did not result in a sale, so, the homeowner in default still owns the house and gets to reside there, and the lender has to restart the entire foreclosure procedure. Thus, the clock starts all over, and there is no assurance that the next auction sales pdrice will come in as high as this one.

If the bank already owns the house, then I think the bank owes the auction company for its time and services.

[Cometcollector]

That, my friends, is one bloated McMansion. Is this what the American Dream has come to? No thanks, I'm much happier in my 1,100 s.f. central city location with things to do, no HOA fees, and no vapid Republican SUV swingers next door.

[Jeffrey Allen Miller NY]

Great clip - thanks. So, that wonderful family lost it for $705k? Shame... the greedy banks just can't learn their lessons for the mess they in fact helped cause. Same is happening here in NY although prices are much less than in LA area. I too have lost three homes simply due to greedy Bear Stearn's idea that they could get more money... Ha. Well, look what happened to them. They deserved what they got. Hope same thing happens to that home's bank.

[Carrie]

We've been to a lot of auctions, REDC, Hudson & Marshall, National Home, and Williams. I have to say it is perplexing. We have no idea why people are bidding so high on properties that in many cases, need major amounts of work. We fully understand the terms and conditions, but not why the banks are holding our for higher prices, it ain't gonna happen. I would think the banks would realize this by the sheer number of these homes that come back in auction after auction. Are the banks getting a tax break by holding these on their books for years?

[rickstar1]

I wanna know who payed $1.2 million dollars for this cookie-cutter style home in the first place? And what's the big fuss with Ladera Ranch? It's just another O.C. development that probably used to be called La Pueblo or Los Stupidos (like El Toro became "Lake Forest"). A bunch of over priced tract homes amidst urban sprawl. I think I'll start packing my bags for Colorado!

[TrojanDLA]

REOs and auctions are an ugly business. Just remember this: the bank sold the foreclosure at a loss of around 70% market value to investors who then turn around and attempt to flip it for a profit of up to 90% current market value.

The auction is the investors' (asset manager, servicing company, etc.) opportunity to unload the property for a profit as long as it sells for the strike price that allows them to make a profit. If they bought that property at 70% FMV, good look ever convincing them to sell for anything less than 85% FMV. That's the nature of this game folks.

And yes I work closely with the investors who buy this REO in bulk as well as the people who sell it. It's a gamble that there are suckers out there willing to pay a "discount" for this stuff. If anybody has $300 million lying around, I can get you California real estate in bulk for 65%-70% of its current market value, then we can flip it for an average 15% return in 6 months. It's a safe game when you look at the numbers: 25-35% of all sales today are foreclosure sales - see? Somebody is buying, let's hope it's not you.

[jag]

I miss lefty. I haven't seen any comments from him. Does anybody know where he is? Maybe, he's on the streets telling people to buy now....specially in Metro L.A.

[IToldu2CashOut]

Yeah something is very fishy with them not taking that offer.

To the people who lost the auction, I would say that one day a few years from now you will look back and say it was one of the best things to ever happen to you. Try the more traditional route.

Plenty of much better deals out there right now. I've seen houses in Dana point with ocean views that won't sell for 750k right now. The smart money isn't buying anything, but waiting for better prices. Good luck.

[Jim]

Was this one of the auctions where AUCTION HOUSE STAFF DRIVE THE BIDS UP?

They claim it is clearly described in the auction material that the company may bid on behalf of the property owner. I won't waste a minute until these auctions are NOT subject to reserves and the auction company can't bid against the public.

[Ned Kelly]

Now the bank is holding him to his bid at auction while it trys to hold an auction after the auction - If I were him I would put a clause in the contract that unless the vendor accepts the offer within the next 30 minutes then the contract will lapse and go back and offer the bank 10% less.

[Enlightenment]

Ha Ha

[NoWayinLA]

What a scam. If the bank has a minimum amount they'll accept for the house, that's what an opening bid is for.

All these banks are really doing is educating the public to stay away from these auctions. That's going to come back to bite them someday when they finally get serious about moving inventory.

The sad thing is, the video gives the impression that the "winning" bidder is wrestling over whether to increase his bid. I sure hope he doesn't. That's a knife he doesn't need to catch.

[Ann]

We having been attending estate auctions, antique auctions, art auctions and all sorts of aurctions for 30 years. I use Ebay a LOT.

Auction with a reserve? An undisclosed reserve?

Nope, I'm not going to play.

Start the opening bid at the minimum acceptable.

Otherwise you are wasting my time.

Don't worry. They will figure it out when the lenders get desperate. Undisclosed reserves are solely the province of inexperienced sellers. Those who jsut want to get the deal done know better.

Real estate auctions have not been widely used over the years - more typical in an estate situation than anything else. To say the real estate indusrty is inexperienced with the concept is an understatement. (And foreclosure auctions are not the same thing.)

[gotforeclosure]

Undisclosed Reserves are fair game. Nobody is forcing any bidder to attend. You can wait for absolute auctions. they will come. Meanwhile banks aren't in the business of predicting the future. If the high bid comes in below a certain percentage of their Broker Price Opinion they're rejecting it.

Having said that, bank owned MLS (and auction) inventory is going to rise dramtically over the course of this year. - Check out my blog for some solid numbers on that (click on my "posted by" name).

And therefore I don't think that "bulk purchases" are a safe bet at this time. - You may very well be the one holding the bag on these.

Move-in buyers on the other hand can buy their dream homes at a good discount now. Save on loan interest, and in 10 years nobody will call you stupid anyway.

[Steve]

Chumps line up for this waste. You are for better off just making low offers in the market place. These auctions nver are effective and always favor the lender.

[tag heuer]

"You want to avoid this nightmare that the lender puts you through, move to CO."

Thanks Steve, but what am I going to do in Colorado ?! Get a job in the cattle industry ? work for a bank ? Then maybe eat at at Applebee's on Friday nights ? NO THANKS. I prefer to live in a world class city and work in my chosen field.

[phil]

Word to the wise: Don't participate in reserve auctions. Wait for absolute auctions.

[Susiebeach]

OK Folks...here's the truth...Ladera Ranch is a fantastic place to live...we have 6,000 homes here priced between320k and 6mil , 330 are for sale with around 100 of those distressed sellers. Does that scare you? Not me...I would rather live in a gorgeous community and pay $3,000 per year and $200 in association than live in a place where our children cannot attend the neighborhood schools and cannot walk to the parks or to school...I know both sides, I have a step child that has commuted to school because the tony Marina del Ray neighborhood that she lives in only has ghetto schools so the price tag for private is $16k and she is not learning what these kids are learning...as far as being sorry for paying a price on a home, those of us that did not buy beyond our means are quite happy to make these low interest, fully amortized payments. Make no mistake, OC is doing just fine. Sounds like sour grapes to me.

[mike]

American Home Mortgage closed escrow on this home last week for $840,000 (per County Tax Assessor Data) and there were numerous follow on offers post auction as well. I guess they look pretty smart right about now