Author Topic: Bidding on a distressed house as a potential flip / rental - Auction is scary!  (Read 5173 times)

CheapskateWife

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That was an awful lot to put in the subject line but it gets right down to the point.

We are considering entering a bid on a 1200 sqft 3 br 1/5 bath home in our community.  It is forclosed, vacant but has abandoned personal possessions, and seems to be in generally OK shape.  Roof is solid, rock exterior, pier and beam construction.  I think we could put about 10K-15K into it and sell it for 40K or rent it out.  We are going to walk the property and peek in the windows but can't get in.  Its being sold AS IS, of course.  Opening bid is 10K, but I am not sure what the reserve is.

Has anyone out in MMM land bought a house at an online auction?  Can you share your experience with me?

What issues should I be considering as I get caught in the competitive bid frenzy?

« Last Edit: March 17, 2015, 01:12:19 PM by CheapskateWife »

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After repair value (ARV) less the cost of repairs (estimate high here because you have not been inside or had the property inspected) times 70 percent is your maximum bid, per the generally accepted rule of thumb.  So if the house is really worth $40k, and the accurate estimate of repairs is $15k, the difference is $25k.  Your maximum bid would be 70 percent of $25k, or $17,500.  That's the MAXIMUM bid, and it's based on accurate information on the value when the work is completed and the cost of repairs.  If you have not done this before, your estimates may not be accurate.

If this is a drug and gang infested area, the property may be close to worthless.  It may also be uninsurable.

The on-line auction sites, such as auction.com and hubzu.com, tend to set high reserves and the properties seem to sell for high prices.  Banks have figured the process out and have control, so bargains do not abound. 

Gone Fishing

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If it was a crack house, they were probably making meth, too.  Just a thought.  Do you already have rentals of this type? If not, I would not suggest starting with a house in a rough neighborhood.  This is a "specialized" type of landlording that takes a "specialized" personality to manage properly.  If you want to get into landlording look for something in a stable, low crime neighborhood, this will help attract stable, low crime tenants.

CheapskateWife

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After repair value (ARV) less the cost of repairs (estimate high here because you have not been inside or had the property inspected) times 70 percent is your maximum bid, per the generally accepted rule of thumb.  So if the house is really worth $40k, and the accurate estimate of repairs is $15k, the difference is $25k.  Your maximum bid would be 70 percent of $25k, or $17,500.  That's the MAXIMUM bid, and it's based on accurate information on the value when the work is completed and the cost of repairs.  If you have not done this before, your estimates may not be accurate.


Oh wow, that is a really good way to look at it.  We were thinking our max was 15K for the bid, but I just realized there is a $2500 "buyer's premuim" due at the sale to the auctioneer/listing agent. At 10K, that's a 25% listing fee...holy crap.

Since posting, I did a thorough review of the crime blotter in the area and its quiet as a mouse, so I have changed my title to "distressed house" instead of "crack house".  Google maps shows some in ground pools in the houses directly adjacent, and the street view looks clean. 

Also am getting to get inside the house after discussing with the listing agent so I can get a good feel for the internal damage.

CheapskateWife

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If it was a crack house, they were probably making meth, too.  Just a thought.  Do you already have rentals of this type? If not, I would not suggest starting with a house in a rough neighborhood.  This is a "specialized" type of landlording that takes a "specialized" personality to manage properly.  If you want to get into landlording look for something in a stable, low crime neighborhood, this will help attract stable, low crime tenants.

That is a good point, but I'm retracting my early first impression about the house being a "crack house."  Police blotter looks pretty clean for the neighborhood, but the previous owner did get thrown in jail for "organized theft of a retail establishment."  Which is likely why the place went into foreclosure.  To add a note of irony to the history of the house, the felon/owner was employed as the "property loss prevention officer" at the local SuperWalmart at the time of his arrest.

Going to go inspect it tonight, take lots of pictures and look for structural, termite and plumbing issues.

TrulyStashin

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My house was an estate and I bought it at auction in 2004.   It was filthy, needed a new roof and a new heating system.  I knew this going in because I did my own home inspection prior to bidding using a list like this http://www.totalhomeinspection.com/totalhomeinspectionchecklist.pdf.

I did my market analysis, factored in the buyer's premium, and decided on my maximum bid.  A broker-friend of mine went with me to advise.   Given that the housing market was hot in 2004, I got a good deal.  Not great, but good and we've been very happy here.   It took two months of cleaning, ripping out carpet, repainting etc before we could move in.  It has taken 10 years of steady, mostly-DIY home improvement to make it a nice place.  I would do it again. 

Good luck!

CheapskateWife

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My house was an estate and I bought it at auction in 2004.   It was filthy, needed a new roof and a new heating system.  I knew this going in because I did my own home inspection prior to bidding using a list like this http://www.totalhomeinspection.com/totalhomeinspectionchecklist.pdf.

Just printed that out and will take it with me on my inspection tonight!  Thank you for sharing!

anon-e-mouse

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I'm hoping it's obvious, but if you find that it used to be a meth house be very careful!
The chemicals can be extremely toxic and/or flammable!
A lot of meth labs are discovered because of the flames shooting through the roof...

If it's simply vacant then you might be in good shape.

CheapskateWife

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Did our inspection last night, and whoa boy, this place needs some work.  It needs a roof, siding on 3 sides, new windows, flooring throughout, a new water heater...but it does have toilets, and a lovely cat piss smell.  This is going to be a fun project :)


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Good luck!  What bid amount did you decide on?
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Midwest

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I've bid on several through online sites haven't closed one.  Couple things to check a) read the contract especially regarding what kind of title you are getting.  We paid for a title search on the last one due to the type of title being offered b) some of the sites charge significant fees.  Pick a # after factoring that in and stick to it. c) We have won auctions and failed to close because the bank didn't like the #.  It's difficult to communicate with them and/or negotiate regarding the condition of the property in these situations.  Much easier to get a deal done directly than through an auction site.

Anybody else had better experiences?


Midwest
« Last Edit: March 18, 2015, 10:40:37 AM by Midwest »

CheapskateWife

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Good luck!  What bid amount did you decide on?

We decided on 15K after seeing the house in person.  There is someone else bidding though and I think we are going to loose this to them.  Its great though because it has been a learning experience so far.

First, this isn't like ebay...the auctioneer can extend the time remaining on the auction in the midst of a bidding war.  This morning, as the clock was winding down the last hour, suddenly, there were 4 more hours left in the bidding.  Sneaky.  Also, it may be AS IS but that doesn't mean you can't get in there and go have a look for yourself.  So glad we called the listing agent instead of paying heed to the "Do NOT tresspass" warning on the auction site.

Second, it is kind of like ebay.  You can easily get caught up in the competition of the bidding process and get in over your head.  So far we have remained cool headed, but the wanting is a strong emotion.

arebelspy

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Bid it, don't go higher, and even if you lose they may come back to you if the winner backs out or is fake (yes, often in their TOS it allows, and they use, shill bidders - so don't go above your number).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Bobberth

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I "won" 4 auctions when auction.com what still holding in-person auctions here in St. Louis.  I closed on 2 and 2 were rejected by the bank.  Every once in awhile I look at their online offerings and I haven't been too interested in what they are selling these days.  I would rather wait for the foreclosure to hit the market.  They are not that scary as long as you keep your head.

I would go in assuming that you will be renting this house instead of flipping it with a price point of $40k.  While it is possible, it is harder for a buyer to get a loan under $50k.  Some banks even have $70k or $80k minimum loan amounts.  If owner occupants that would live there can't get loans, they can't buy your flip.  Keep that in mind when choosing finishes and deciding on scope of work.


waltworks

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Looked at a couple places through auction.com a few years back and ended up deciding it wasn't going to be worth the effort. Auctions are *mostly* for properties owned by the same company that is doing the auctioning, and they will proxy bid the price up to their chosen level. THEN they often will refuse the "winning" bid. In cases where you do win and close, the auction fee will add significantly to your costs.

So, IMO waste of time. I don't even look at online auctions anymore. Days of crazy bargains are long over so now you're bidding against A) the bank, who isn't that desperate and B) stupid people who think that buying foreclosures is their ticket to the good life and will overpay. All for the chance to maybe not even "win", if by "win" you mean "end up owning the house".

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CheapskateWife

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Thank you all for the thoughts...we were the high bid at 14K, but didn't make the "reserve" so at this point, its kind of unclear what is going to happen.  There has been no communication at all, either acknowledging my high bid, or rejecting it outright.

This is starting to feel like applying for a job...except I have cash in hand, darn it!

waltworks

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If their MO is the same as it was, the property will just come up for auction again in a month. And again. And again.

-W

Thank you all for the thoughts...we were the high bid at 14K, but didn't make the "reserve" so at this point, its kind of unclear what is going to happen.  There has been no communication at all, either acknowledging my high bid, or rejecting it outright.

This is starting to feel like applying for a job...except I have cash in hand, darn it!

Another Reader

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Or they will list it at $39,900....

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Bought a second home/weekly beach rental through online auction hubzu.com last summer. Downright crazy process.

1. Found home in area I know very, very well. Knew it was a great buy, even though it was a foreclosure that had been empty three years.
2. Entire online process was outsourced to India by Hubzu via Ocwen.
3. Made lowball bid with Realtor's help. Got email the next day saying, "Due to heavy interest, please submit your best offer by tomorrow at 5."
4. We figured it was bogus, but played along. I made an offer that allegedly was $5,000 below the winner.
5. Kinda bummed out about losing. Got a call from my Realtor a week later asking if I'd seen the email saying my backup offer was accepted. (I had deleted it since the sender looked like a Nigerian-prince kind of email.)
6. We were given a week for inspections and 30 days to close. We weren't able to turn on the water prior to closing. Pipes had frozen but plumber advised (correctly) that damage was minor. Pool guy took cover off and though it was a green lagoon, he said (correctly) it had no issues. After closing, we spent 24 furious days getting it ready to rent to take advantage of August/September rental season. Someone could have filmed a great reality show about the whole process.
7. The house is ours, a 1,300-square footer we plan to live in full time at FIRE.

CheapskateWife

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Or they will list it at $39,900....

Are you psychic?  That is exactly what happened :)

The bank didn't even respond to my bid, just listed it on MLS the next day.  For $39K.  Then the auctioneer called me up to tell me that the bank was "reviewing my offer"  and that we would have our answer in 5-7 business days.  Funny, because to me, seeing it listed on MLS was a pretty clear answer.

Another Reader

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Not psychic.  Seen the phony auction behavior any number of times.

Offer what it is worth and stick to your guns.  Maybe they will eventually give up or maybe they will sucker someone in at a higher number.  In the meantime, keep looking.

CheapskateWife

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When a door closes, another one opens....just ran into an old friend who is being relocated and looking to liquidate his RE holdings.  Nice 10 yr old house in a great neighborhood and solid rental history.  I think we have a winner!