Next month, Real Estate Disposition Corp. (REDC) will gather potential buyers into three different convention centers in Arizona and will auction nearly 1,700 homes located in the state's East Valley.

REDC spokesman Rick Weinberg says his Irvine, Calif.-based company is on pace to exceed last year's record of 32,799 homes auctioned at 301 events around the country that generated $3.4 billion in sales. Other auction houses, such as J.P. King Auction Co. and Max Spann Real Estate & Auction, are seeing similarly robust activity at their events.

But even as foreclosure filings continue to mount nationwide, certain stages of the disposal process remain cumbersome and archaic. The number of distressed properties that are purchased at foreclosure auctions, such as those conducted by trustees or on courthouse steps, has been declining in several markets. That means properties get returned to banks that must endure carrying costs of 1% to 1.5% per month until they can find willing buyers on the open market or, inevitably, at resale auctions.

Historically, about 15% of foreclosed properties got sold to third parties at trustee or foreclosure auctions, which usually attract more sophisticated investors who occasionally include contractors. But Rick Sharga, RealtyTrac's senior vice president of marketing, told MSNBC last week that a much smaller percentage is being liquidated that way right now, "and a huge number are being taken back by banks." Sean O'Toole, founder and CEO of, which tracks foreclosure activity in California, has been quoted recently as stating that fewer than 4% of foreclosed homes in that state have been attracting buyers at foreclosure auctions.

The Puget Sound Business Journal reported last week that the number of foreclosed homes made available at foreclosure auctions fell by 40% in 2008. And of the 172 homes the newspaper had been tracking since last December, only five had sold at auction on the appointed day.

This isn't all bad news, as some sales are being canceled because owners find new financing or negotiate loan modifications with their banks. "That's a good thing," says Craig King, president and CEO of J. P. King Auction Co., which is based in Gadsden, Ala.

But Chris Matty, chief marketing officer for ForeclosurePoint, which among its services provides tools to help investors research properties, contends that potential investors are shunning foreclosure auctions because the process itself is inefficient and opaque. For example, he claims that opening bids at these auctions are typically "drop bids," or below what the lender has defined as the default amount. Each state has its own regulatory guidelines for how foreclosure auctions must be conducted. And buyers still must do their own research about the quality of the properties.

In addition, banks might not know for months after a foreclosure auction that the unsold distressed property has been returned to them. And it has been known to take another year before a bank puts its REO property up for bid again at a resale auction, partly because banks that are overwhelmed by their repossessed inventory continue to struggle with making realistic assessments of an asset's value.

Not surprisingly, Matty thinks an auction industry "that's still operating on paper" would benefit from the greater application of technology to make the foreclosure and resale processes work better. He points specifically to software that helps investors and banks track market valuations, submittals, and evictions.

First timers flock to resale auctions

Matty estimates that while only about half of all foreclosed properties ever get presented to buyers at auctions like those conducted by REDC or J. P. King, "REOs are where the action is." But the jury is still out about whether banks are more willing now to offer their non-performing residential assets via those kinds of auction events.

Robert Dann, vice president of operations for Annandale, N.J.-based Max Spann, tells BUILDER that an auction of a 16-unit property in Wildwood Crest, N.J., his company had scheduled for last month got postponed because "the banks weren't sure [about the market] and are holding back their inventory." On the other hand, Dann says Max Spann has been meeting "with a lot of banks lately that are willing to put inventory up for auction."

Any sea change among banks is occurring, at least in part, because regulators are pressing lenders to get these assets off of their books faster. Another dynamic, though, could be the appearance of more people at bank auctions who are interesting in purchasing a house to live in, as opposed to flipping it, and are willing to pay more than investors might.

Earlier this month, REDC conducted an auction at the Washington Convention Center in Washington, D.C., of 200 or so properties located in the District of Columbia, Maryland, and Virginia. More than 2,000 people attended the event, says Will Smith, publisher of UrbanTurf, a real estate Web site, who covered the event. And about 80% of those who bid on properties were first-time home buyers.

Weinberg says that REDC's auctions typically close between 80% and 85% of the properties they offer, at prices that range from 50% to 60% of the home's "previous" value, which he and other sources say is a lot better than what a distressed property might fetch at a foreclosure auction. "This shows that banks are accepting most offers [because] it's important to them to get the toxic asset off of their books," says Weinberg.

King adds that home buyers who are coming back into the market are not as intimidated by the auction process as they once might have been. They are also more confident, he says, that "whatever they bid is the real value of the house."

While his company has plenty of inventory to offer at auction around the country, King sounds a note of regret that a still-dysfunctional housing and mortgage banking sector has to dispose of homes this way. J. P. King has a 50-property auction coming up in Atlanta, and King says that many of those homes are brand new, which means that banks and builders weren't able to come up with a workout solution.

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Phoenix, AZ, Washington, DC, Olympia, WA.