Author Topic: Buying Homes at Auction  (Read 2976 times)

freeazabird

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Buying Homes at Auction
« on: May 14, 2014, 02:12:29 PM »
Hi. I'm interested in learning more about buying homes at auction. Do you need a realtor or lawyer to buy at auction? Are there any books or other resources you'd recommend for learning about how auctions work? How has your experience with auctions been?

johnhenry

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Re: Buying Homes at Auction
« Reply #1 on: July 10, 2014, 01:30:56 PM »
No need for a realtor or lawyer to buy at auction.  RE auctions I've been to(local, in person, not internet) usually call for 10-15% of the purchase price to be paid on the spot by the highest bidder.  The auctioneer will always disclose all of the terms at the beginning of the auction, but it's typical for the closing to be set about 30 days from the auction date.  You'd need to have the rest of the cash or arrange for financing by that date.  Also, pay attention to whether it is an "absolute" auction, with no reserve price set by the sellers.

Most auction companies will require bidders to provide proof of funds or a letter of credit approval from a bank before they are given a bid ticket, similar to what might be provided if you were making an offer on a house offered for sale.

I'd recommend attending a few auctions to watch the action, first.  But if you think there's any chance you'd want to have a shot at the property, you'll need to take your driver's license along with proof of funds or letter of credit to the auction (just in case those are asked for).

Also, MANY real estate auctions now include a 10% "buyers premium" that is tacked on to the final, highest bid.  If your final bid is $40K, you've agreed to pay $44K for it.  This is in addition to the commission (in my area, around 6%) that the sellers pays the auctioneer. 

With all that said.... my personal experience has been:  In the last several years, in the midwest, real estate auctions have become much more competitive.  I no longer see property selling at auction for "rock-bottom prices".  In fact, I'm finding that browsing FSBO and MLS listings is much more likely to land me a good deal than an auction.  In fact.... if I were to want to sell my home, I'd list it first FSBO to try to avoid fees and commissions... but if it hadn't sold and I was in any kind of hurry to sell.... I'd list it for auction instead of listing with an agent.  This would be especially true if I were forced to move and sell an empty house.  Every month of paying utilities, taxes, insurance on an empty house adds up and you eat that cost no matter what.

If you go to an auction, and especially if you participate, you'll learn that auctions (especially where the big "real estate" item is concerned) are very personal, engaging experiences.  The auctioneer will slow down, speed up based on the bids he's getting.  The auctioneer has "handlers" that "work the crowd", standing right next to the active bidders to "feel them out" and entice them for a higher bid.  If the price has stalled well below what he knows it's worth, the auctioneer will grind the auction to a halt and then inject a short speech, making the observation that "there are pickup trucks here worth more than the bid we've got on this house".  He's naturally doing everything in his power to get a higher price and most of them are very good at it.  Bidders often become emotional, competitive, and with all eyes on them and under pressure to make a decision in a short period of time, it's possible to let emotion overtake rational thinking.  Auctioneers usually advertise extensively.  They get the word out about their auctions with no reserve.... and even if there's not a big crowd, there are usually quite a few serious buyers present.

I'm not advising against buying at auction, but the environment is much different than making offers/counteroffers in a traditional sale.  I'd just advise getting a feel for the action before jumping in.

The last auction I went to was for a house in blue-collar section of a small midwest city.  I own a house just down the street from house at auction and I paid $40K for it (they were asking $45K).  The place I own is solid and needed $0 in rehab or repair to rent out (for $625).  The place at auction needed appliances and probably $6K - 8K in rehab to be ready to rent.  Heading to the auction, I thought this place would sell for $28K - $32K (after 10% fee).  In my mind I was prepared to pay $28K for it.  Even with 8K rehab required, I thought it would do better than the place I already owned down the street.  He tried to start the bidding at $30K and had to go all the way down to $6K to get his first bid.  Then the bids got "stuck" for several minutes at $12K.  Then they got up to $18K (my bid).  I bet he held the bid there for 15 full minutes.  Finally someone bid $19K and he got a few more bids.  It slowed down again in the $24-$28K range (where I quit) again and the final bid wound up being $34.5K ($37950 after buyers premium).  I don't think there is any way that house would have sold through an agent for that price.  And if it did, it would have taken months to do it.  It was an estate sale and I saw the sellers talking to the auctioneer afterwards.  They were absolutely thrilled.  I almost got a $30K house for $19800.  Someone else wound up getting a $30K house for $37950.  I think there 5 total bidders, including me.  Only about 3 others there to watch.  It was a rainy, dreary day.  For nicer places and nicer weather there will be more people out just being nosy.  Nearly everyone here was all business.

JayKay

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Re: Buying Homes at Auction
« Reply #2 on: July 10, 2014, 01:54:55 PM »
Thanks for your story, John.  I have only heard the scary tales, but as someone who's not a licensed contractor, I don't think I'd bother.  As you've said, there's good deals to be had on the MLS without the craziness.

Also, I think that all of the reality shows about it doesn't help matters.  Just like storage locker or car auctions, as soon as I see it on TV, I'm picturing a thousand guys going out to the auction that weekend, all determined to be the next big thing and they'll all overpay just to prove it.  :)

Here's a tall tale:  I've heard that in Vegas, when a house goes up for auction, it's all orchestrated.  The big players have a team of tradesmen ready to drive to the address as soon as it's announced.  Their locksmith literally breaks into the place, everyone estimates the cost of their part of the work, and within 10 minutes they know exactly what they should bid on it and radio it back to the bidder.


arebelspy

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Re: Buying Homes at Auction
« Reply #3 on: July 10, 2014, 02:01:15 PM »
Every auction is different.  I'd suggest you go start watching and learning.  Talk to experienced investors in your area.  Stuff I could tell you about the Vegas auctions probably wouldn't help much in Kansas City, or Jacksonville.

Other than general stuff, like do your due diligence, make sure you know which lien you're bidding on (some OUCH stories with this one), etc.

Oh, and do a search for the previous topic(s) on this.  :)

Here's a tall tale:  I've heard that in Vegas, when a house goes up for auction, it's all orchestrated.  The big players have a team of tradesmen ready to drive to the address as soon as it's announced.  Their locksmith literally breaks into the place, everyone estimates the cost of their part of the work, and within 10 minutes they know exactly what they should bid on it and radio it back to the bidder.

A very tall tale indeed.  You think they're doing breaking and entering?  And why wouldn't they know the property addresses ahead of time?

What do they do if the house is occupied still, but the people aren't home?

Thanks for the laugh.  :)
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.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Bobberth

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Re: Buying Homes at Auction
« Reply #4 on: July 10, 2014, 03:42:59 PM »
I 'won' 4 houses from Auction.com a couple of years ago.  I ended up closing on 2 of them as the bank refused to sell the other 2 for my bid.  They used to come to town and put on big productions but they seem to be online only now, at least here they are.  It was pretty cool walking across the front of the room with 1500 people starting at me amazed that I just bought a house for $11k.  Lately I see many of their properties are occupied and you can't view them-they appear to be pre-foreclosure auctions and I don't even click on the links to see what is for sale any more as it's easier to buy the already foreclosed houses on the MLS then screwing around bidding and possibly being declined.

If you're talking about the auctions on the courthouse steps, I'm very intrigued but have never been to one.

SDREMNGR

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Re: Buying Homes at Auction
« Reply #5 on: July 12, 2014, 08:09:50 AM »
There are basically 3 different types of auctions per my knowledge. The retail sale types on auction.com or some private auctioneer, the courthouse type for foreclosures, and the tax sale auctions done by the local assessor.  The courthouse ones are probably the ballsiest and scariest imho. That's the one where you have to do more investigations to make sure title is clean and you get very little access to the house if any. Also your competitors are knowledgeable local experts who have been doing it for a while and buy several homes each month or more and there are a handful of them.  They have expert construction people who can do the repair work cheaper than you can and they know property values better than you. So typically, the only way you can win is by over bidding them and possibly taking smaller profits than them because they won't touch things with too small a profit. The tax sales are similar but you are buying the tax lien and trying to foreclose on the owner or get them to lay you back plus interest.  You have to know the property values and the status of other liens. If you buy a $50k tax lien on a $200k house with a 1st lien of $300k and the owner walks away, then you are sort of screwed. So you do have to do your homework on these too.  It's very possible to make money on these types of investments but do know that it's a specialty and a job like any other job and the more you know and more experience you have, the better you get at it.  And you need CASH.

malacca

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Re: Buying Homes at Auction
« Reply #6 on: July 13, 2014, 08:40:44 AM »
I purchased a lot of homes in AZ from auction. But I used a service. 1) It is just too hard for the average Joe to due the necessary due diligence on the title. 2) You may spend a week standing outside to get one property. 3) The guys running the service were really title agents and guaranteed the title - very important.

The service charged about $1000 per house and that included all legal work to get it quit claim deeded in your name.

AZ auctions were great 3 or 4 years ago. So many houses and few bidders. Now auction prices are MORE than short or distressed sales. Why? Because inefficient institutional money has moved in. They have hired people to buy houses for them. The hired help doesn't want to do the work of completing a short sale. With an auction, once you win the bid the house is yours upon payment to the sheriff. With a short sale it takes forever as there are so many players involved that have to justify their fees.

I also had a B&E realtor. One day I was scouting a property that was scheduled to go to auction. Usually there are many buyers checking out these properties. But this guy went right in the front door. Normally you are not allowed to go in (breaking and entering aka B&E).

But this guy's philosophy was that if the place is vacant who cares? He could open the front door faster than someone with a key. He would then make a quick list of needed fixes. This info was sent to clients and we would then bid appropriately. So I hired him.

He was very accurate in his estimates & list price. It was like shooting fish in a barrel - you couldn't miss.