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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.

The lawsuit notes that there has been a boom in the volume of foreclosed, lender-controlled properties — also known as real estate-owned or REO properties — sold at auction (see Inman News report).

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.

Irvine, Calif.-based Real Estate Disposition Corp., an auction company that maintains a real estate broker’s license in 21 states and Washington, D.C., and last year sold $1 billion worth of residential real estate at auction, is named in the lawsuit. This year, the company expects to sell $3 billion worth of properties at auction. Representatives for REDC, which operates the USHomeAuction.com Web site, could not be reached for comment about the lawsuit.

Other auction companies named in the lawsuit include LandAuction.com, an REDC affiliate; DoveBid Inc., which has a partnership with brokerage company CataList Homes to sell homes at auction; AuctionHouse Real Estate Disposition Services; Kennedy Wilson Auction Group Inc.; and Auction Services International Florida 100 Realty Inc.

Michael Davin, president of CataList homes, a low-cost Southern California-based real estate brokerage company, said in a statement, "I can’t comment specifically on the case as I haven’t read the documents. However, we will stand firm and defend our auction practices as the reserve auction method is an effective and fully legal sales process utilized for hundreds of years in the sale of many types of assets."

Stephanie Taylor, director of business development for Sacramento, Calif.-based AuctionHouse, said her company has not yet held an auction and she was surprised to hear about the lawsuit.

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."

Shawn M. Olson, a lawyer for Spainhour Law Group, which filed the lawsuit on behalf of the auction attendees, said that there are three proposed classes in the lawsuit: the first class is for real estate auction attendees, the second is for people who attended the auction and entered a winning bid but ultimately did not purchase the property, and the third class is for those who attended the auction and actually purchased the property.

He said that there appears to be a systemic problem with the practices at real estate auction companies.

His law firm represents several RE/MAX brokers, he said. "There were a lot of RE/MAX brokers who were complaining about the process of these auctions and how they’re unfair," Olson said.

The class-action lawsuit could extend to tens of thousands of people if the class-action status is certified by the court, Olson said, and could stretch back about four years.

Peter Terracciano, a broker for RE/MAX All-Pro in Lancaster, Calif., is named in the complaint as an individual who purchased a property at auction.

Another individual in the lawsuit reportedly was a winning bidder for an auction property but was later "informed that she would not be able to purchase the property unless she came up with $50,000 more money, putting the price of the home almost 30 percent higher than her winning bid price."

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.

A spokesman for GMAC Mortgage LLC said the company had no comment about the lawsuit. Representatives for Countrywide and the title and escrow companies named in the lawsuit could not be reached for comment.

Title and escrow companies named in the lawsuit include: Benchmark Escrow Inc., Landsafe Title of California Inc., and First American Title Insurance Co.

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