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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: EMP on September 11, 2013, 11:15:04 PM

Title: Real Estate Auction Q's
Post by: EMP on September 11, 2013, 11:15:04 PM
I've noticed that houses in my area sold at auction typically go for 66-75% of the cost to buy through the usual process. Estate auctions that is, I don't know thing one about foreclosure auctions.

So, has anyone here bought a house this way? Any tips? Special concerns or considerations?
Title: Re: Real Estate Auction Q's
Post by: TrulyStashin on September 18, 2013, 08:10:13 AM
I bought my home at auction in 2004.  It's a brick and stone rancher built in 1963 and I am the second owner.  In 2004, it was filthy (cat pee odor and nicotine stained walls) with original appliances, oil-fired boiler, 70's-era carpet (over hardwood), and 1980's era central A/C unit.  There was neither a plug nor a vent for a clothes dryer (I guess they were REALLY Mustachian).  The roof was questionable.  The heirs auctioned it because there was NO WAY it would sell easily with a broker.  The cat pee and cigarette smell was so overpowering that everyone's eyes watered and nose ran the minute you stepped inside.  I got it at a good price (not a great one -- the market was pretty hot in '04) and worked on it for 2 months before we could even move in.  It has been an ongoing project ever since but I'm overall very pleased because I am a single mom and it has been my family's anchor to a stable, middle-class lifestyle and good schools.

First, any house you buy at auction is purchased "as is" so be sure you that inspect it yourself first.  Often times, a home that falls into an estate and ends up at auction is being auctioned because it has significant problems that the heirs are unwilling/ unable to remedy in order to sell it with a broker.  You cannot void the sale if you discover something after bidding but before closing.  I created a home inspection checklist and showed up at my house on the "open house" day to inspect it.  I had a flashlight, clipboard with list, measuring tape, and both binoculars and a ladder so I could inspect the roof and chimney (binoculars as backup in case they wouldn't let me use the ladder to get on the roof).  Know what asbestos flooring tiles/ ceiling tiles/ insulation looks like so you can flag it if it's there.  Bookmark at least 2 hours and inspect the house from stem to stern so you have some sense of the challenges.  I knew before I bid that my house would need a new boiler and A/C unit; that the hardwood was under the carpet and likely in good shape; that I needed to plan for a new roof within 5 years but it wasn't leaking; that I'd need new appliances; that the electric panel needed to be updated.   I set my upper bid price accordingly.

Second, most auctioneers tack on a 10% buyers fee.  So if you bid $100k, you'll actually pay $110k.  Plan for this and factor it into your bidding.

Third, do a market assessment of the home's value as-is. Decide before you show up at the auction what your absolute top price is (include the buyer's premium).   My absolute top bid price was $160k, which with the 10% premium, put the purchase price at $176k.  Be ready to walk away.

Fourth, the owners (if it's an estate, the heirs) can set a reserve price and sometimes they do themselves no favors by setting a reserve that is unrealistic.  In my case, the heirs had set a reserve of $180k (total purchase price with premium = $198k) which was insane given the condition of the house.  When the auctioneer opened the bidding at $180k, the crowd literally gasped and NO ONE BID.   He closed the auction a little while later without a single bid -- the house hadn't sold.   Because he was there the day that I did my inspection two weeks earlier, he knew I was a serious buyer and if he could get the price right he'd have a sale.  He found me in the crowd and said he'd waive his premium if I'd pay $180k.  Because it was higher than my $176k threshold, I said no.   He stomped over to the heirs and negotiated with them for a bit.  He came back to me and asked if I'd do $176k with no premium.  I thought for a bit and then agreed. The house was mine.

I'm currently helping my BF look for investment properties and we're watching the auction websites.  I'd buy at auction again, with the right precautions.
Title: Re: Real Estate Auction Q's
Post by: Kira on September 18, 2013, 12:30:01 PM
Great info, thank you! I worked as "security" at tax sale auctions once in a while a few years ago and another thing I would mention is that with the company I worked for, you had to put down a sizable chunk of cash THAT DAY. As in immediately after winning the auction. I think it was the 10% buyer's premium that TrulyStashin mentioned. Lots of guys showed up with wads of hundreds. Then you got 30 days to come up with the rest of the money, and unless you already had a loan going, that can be pretty tough. So I think most of the buyers were planning to purchase with all cash or mostly cash. If you can't pay in 30 days they keep your 10%!

And definitely agree on the inspection.. bring a knowledgeable friend along, or, if you really really want the house, even a real inspector. Most of the houses do not have water or gas turned on, and some don't have electricity, so there may be no way to test the toilets or furnace.

Some of the people who came to these auctions did seem to be trying to get their hold on the real estate ladder.. though I was not supposed to tell them anything about the properties, I did make sure to tell the nice families to look in all the closets (including the one that had black mold crawling down the walls from the attic access in its ceiling.) Definitely caveat emptor. These houses have often been sitting a long time and stuff goes wrong in a house with no air circulation or anyone to squash a bug now and then.
Title: Re: Real Estate Auction Q's
Post by: EMP on September 18, 2013, 12:45:13 PM
That is some great info. Thanks!

I've been to a couple of these just to observe the process. I've decided I need to go to more to figure out who the players are and who will just jerk you around and drive up the bid for the fun of watching you sweat.

I'm also curious if the sellers provided proof the title was clear before the sale? Or did you have to do that yourself? I'm sure it varies from sale to sale, but what's standard?
Title: Re: Real Estate Auction Q's
Post by: TrulyStashin on September 18, 2013, 05:43:59 PM
Real estate lawyer here......

If the title isn't clear then the property is not marketable.  Providing a clear title is the seller's responsibility and if they fail to do so, you're not obligated to close and can walk away and likely even get your deposit back.

If you have a specific property in mind, I'd also recommend that you go to the land records office for the relevant county/ city government and look up the property (you might need the parcel description or tax ID #).   Lienholders record their liens in the land records and you can see what banks hold notes/ deeds of trust (different states use different terms) and the amount due.  That will likely give you a good idea of the reserve the seller may have set -- they need to pay off the note!