Interested in Foreclosures? The Privatization of Foreclosure Auctions

Considering buying a foreclosed home? Private auction companies offer an alternative to sheriff sales, which can be inefficient and time consuming. Privatized sales are increasing in Ohio, as lenders experiment with them and are impressed by the results.

How it works: After a judge rules in favor of a bank's foreclosure suit, the lender petitions the sheriff to auction the property. However, the lender can instead ask the judge to appoint a private auction company. This little known state law explains why privatized foreclosures are still rare.

Benefits: Private auctions allow homes to be marketed in conventional ways, i.e., through advertising, open houses, and appearances on real-estate sites fed by the MLS. Potential buyers can see and inspect the inside of the home for themselves. By omitting the bank from the process, private auction sales speed up the process, which is more mainstream. It also allows a homebuyer's agent to earn a commission. Sheriff sales, on the other hand, neither market homes nor offer a commission. They attract few bidders, causing banks to buy back the properties to safeguard their investments.

The Numbers: Barry Baker, founder of Ohio Real Estate Auctions, shared that while 90% of properties auctioned at Ohio sheriff sales had to be bought back by banks, banks have bought back less than 5 percent of the 100+ foreclosed properties that his company has auctioned. Moreover, Baker's company sees many properties that have already, and unsuccessfully, gone through the sheriff-sale process.

Disadvantages: Buyers may have to pay more for a foreclosure auctioned by a private company. The Columbus Dispatch provided one example. A Geauga County property was originally auctioned by the government with bids starting as low as $73,300--with no takers. The property was then given to a company, which marketed it, attracted over 20 bidders, and sold for $170,500--more than twice the original bid in the sheriff sale. While the price for the home mostly increased due to competition resulting from marketing efforts, private auction companies can charge a fee for their services and for the commission to the buyer's agent. Ohio Real Estate Auctions charges a 10% buyers premium to cover such costs. Another debatable disadvantage deals with the fact that a government function is being replaced by a private one. Executive director of the Buckeye State Sheriff's Association Robert Cornwell fears that private auction companies are mainly profit driven, whereas the government works for the people. He is also concerned that sheriffs may be reluctant to give up one of their long-standing duties.

Overall, private auctions market a home conventionally and allow for a quicker, more efficient process that differs much less from non-forclosures than sheriff sales do. For more information on how to buy a foreclosed home, watch the brief video, below.