The Housing Chronicles Blog: Lawsuit challenges real estate auctions

Wednesday, June 18, 2008

Lawsuit challenges real estate auctions

A lawsuit against companies which auction homes has been filed in California Superior Court according to Inman News, arguing that the "sold" price is really only an offer to the existing owner and that the companies force buyers to use their in-house settlement services. From the story:

A lawsuit filed in California Superior Court challenges real estate auction practices, charging that some auction companies engage in deceptive advertising and violate provisions of federal law related to real estate closing services.

Many modern real estate auctions are nothing more than a bait-and-switch scheme to lure hopeful buyers to submit offers that can later be accepted or rejected by the lenders/sellers, despite the general public's perception that once the auctioneer declares, 'Sold,' the property is in fact sold," the lawsuit charges...

Filed June 12 on behalf of three individuals who attended a real estate auction event in Southern California -- including one individual who is a RE/MAX real estate broker -- the lawsuit also charges that auction companies "direct and require the use of their settlement service providers and shift the cost of sales, including commissions, from the lenders/sellers to the consumers" in auction event signing rooms.

"The lenders'/sellers' representatives are not found in the signing room to sign the contracts; rather they are just there (to) sell loans and other settlement services," the lawsuit alleges.

Several auction companies, lenders Countrywide Home Loans Inc. and GMAC Mortgage LLC, and title and escrow companies are named as defendants in the lawsuit, which seeks class-action status...

In a reserve auction, which is common for real estate auctions, properties may ultimately not be sold to the winning bidder if a reserve price -- which is typically concealed during the auction process -- is not reached.

Real estate auction companies typically state in materials presented to attendees that sales are subject to lender approval, which means that winning bidders may not ultimately get the property at the price of the winning bid -- a lender may ask for a higher amount in order to complete the sale.

The lawsuit charges that auction companies use "fine print and covert documents at the auction event that state, 'subject to lender confirmation,' instead of truthfully saying, 'no sale is final today because the lender/sellers are not onsite at the live auction.' "

And the lawsuit charges that the fees collected by auction companies are in some cases unlawful under California real estate laws.

According to the complaint, the auction companies and other companies named in the lawsuit allegedly violated provisions of the Real Estate Settlement Procedures Act related to prohibited payment exchanges related to loan transactions and settlement services and "requiring the use of certain settlement service providers including ... title insurance companies."...

The lawsuit seeks to permanently enjoin the parties named in the lawsuit from using the auction-marketing methods and to be enjoined from violating unfair competition laws. Also, the lawsuit seeks to restore "all funds acquired by means of any act or practice declared by this court to be unlawful or fraudulent or constitute unfair competition ... or untrue or misleading advertising," among other relief.

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