Auction - Max Bid - What Gives?

Question

I went to a foreclosure auction yesterday which was a trustee's sale on the courthouse steps in California.  A condo I was interested in came up for auction with an opening bid from the lender at $181,000.  I bid $1 over and was immediately told by the auctioneer that then the price would now go to the lender's maximum bid of $256,000.  This amount is at least $50,000 over the value the property.  What is this about?  Why would the lender have a maximum bid?  
In checking the results for yesterday,  the trustee shows the that the property reverted to the lender at a price of $181,000. 
Does anyone have an idea of what is going on here?
Thanks for your help.

Vikram C. · Answer

I think the terminology may be different in the East Coast.  Over here, the minimum bid that a bank will accept is called the "opening bid", not the max bid.  Having said that, there are a few other types of bids called jump bids, max bids and protected bids.  The OP's post seems to be one of those rare ones where there was both an opening bid and a max bid.  When that happens, the bank takes it back for the opening bid if nobody else bids on it, but they are willing to bid it up to the max bid in competition with other bidders if there are other bidders.  When they do that, the completed transaction has to reflect the final highest bid price at which the property was taken back, which should be higher than the highest 3rd party bid for the property.  In the OP's case, it appears as if her "buck over" bid got outbid by the bank and yet the records showed it as having reverted to beneficiary at the opening bid price.  That is not right - it is either a clerical error or something else.

Jeff B. · Answer

The max bid was used all the time at the Palm beach auctions prior to them going online.  It basically saved a lot of time.  You knew the lowest amount the bank was willing to accept and if it was a number that works then you bid.  Beats having a bunch of rookies bidding in $100 increments and never reaching the banks lowest acceptable price.

Justin S. · Answer

Hi Mary-

I've heard them be called "min-max" bids or jump bids.  They are not all that common but do occur.  The auctioneer is instructed by the trustee to bid up the property to certain amount.  One happened a few weeks ago to me where the auctioneer was instructed to bid in $10,000 increments until a the max price which was way more than anyone was willing to pay.

So, they do happen but are somewhat rare.  You just happen to catch one.

If your an investing though, I don't recommend buying properties for 181K when they are worth 200K.  Good luck though.

Account Closed · Answer

Thanks for the reply.  I went to Seminole county's auction today, which is not online, and one guy always said the max bid and another guy never said a max bid, just the starting bid of $100.

Account Closed · Answer

Is there a way to find the banks Max or Min bid (depending on where you are) prior to the auction starting?

Account Closed · Answer

My guess is that they don't want to sell it.

They must offer it at auction but just want to take it into inventory. So the bank makes the first bid and then jumps to the point where no one else will bid.

As to why they don't want to sell it, who knows what the banks are trying to do. It often makes no sense at all.

Brian Burke · Answer

Mary, since you asked about an auction in California, my answer is limited to CA procedures...this may vary in other states.

The borrower that owned the property you were bidding on owed their lender $256K or more.  The lender cannot bid more than they are owed.  They CAN bid less than they are owed, and if they do, they have the right to competitively bid up to the debt amount.  In this case they started the bid at $181K which is less than the total amount owed.

Sometimes they just want to offload the property so they start the bidding low and do not competitively bid.  Sometimes they want to try to get a higher price so they start the bid very low and competitively bid hoping other bidders will get auction fever and pay too much.  And other times they set a low bid but have every intention of taking the property back, so they competitively bid up to the total debt, which frequently exceeds market value.  They could just open the bid at the total debt, but for a variety of reasons that make sense to them but not us, they don't.

Wayne Brooks · Answer

About half of the properties in the online county foreclosure auctions will show the bank's max bid.  If it's not published, then there's no way to find out.  Usually this means the bank didn't take the time to establish their "take out" number, so the judgement amount is probably their max bid number.  One reason that they post a number is so that if you're not willing to go that high, you won't bid, because whatever $ the bank bids, they have to pay about 2.2% in fees and doc stamps even when they take it back.

Mary Winleigh · Answer

Thanks for all the replies.
Vikram, your right, there was an opening bid and a maximum bid.  I'm still trying to find out why lenders do this.  It effectively sends the property back to the lender and makes the auction seem like a sham.  A RE broker I talked to said that he has seen it a few times and thinks its related to tax write-offs for the lender.  Another said to not be surprised to see a bank's exec or one of his family living in the house.
I agree with you guys that the price recorded should not have been the opening bid.  I called the trustee to ask why it was shown as $180,000 and they really couldn't come up with a good answer.

Chris Martin · Answer

Isn't this process defined in the mortgage/deed of trust? Seems like the "rules" should be spelled out ahead of time and not on the whims of the trustee. In NC, for example, I've never seen this. Probably because state law and the sale process defined in the D-T are very exact.

Auction - Max Bid - What Gives?

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