There was an auction for a couple of investment properties in my area not to long ago and I decided to go and try my hand. I have never had any success buying properties at an auction. Someone always seems to be doing too much at auctions, such as asking for or paying too much. Would this auction be the same or would I finally get to say I have purchased a property at an auction?
Unfortunately, I still cannot say that I have purchased a property at an auction. The owners were asking for too much. However, the auction was still interesting and in my mind worth going to for a few reasons.
Lessons Learned at the Real Estate Auction
First is simply for the experience. An auction can be intimidating. You are bidding out in the open against others standing right there looking at you. No hiding behind an e-mail offer here. The auctioneer is pointing at you and trying to get you to bid more. You have to be cool and focused. It was worth going just to get some more of that experience under my belt.
Second, the auction validated my investing knowledge and techniques. Prior to the auction, I toured the property, reviewed the financial statements, ran my numbers and developed a maximum bid. During the auction, several other investors also showed up to bid. Soon after the auction started, the price was quickly established a bit above my max despite the best efforts of the auctioneer. The market had spoken and it felt satisfying that I was in tune with the market.
The market spoke again at the second property auction. This property was a four-plex in a desirable area surrounded by single family homes. The owners had poured a lot of money into the property and it was in great condition. The single family homes in the area were selling for $300,000 plus. But the numbers on the four-plex did not justify a price much above $160,000 and again, and that was the price were the bidding stopped.
It did not matter that the property was fixed up so well. It did not matter that the single family homes surrounding it were selling for so much more. This was an investment property and the market dictates what you can generate in rent and thus what the price will be.
So finally, participating in this auction reminded me to listen to what the market is saying and to trust what my numbers are saying to me. Sometimes we need to be reminded of that every once in a while as bidding, competition, hedge funds or whatever else drive up prices. We as investors need to remember that 2 + 2 always equals 4, never 5. If the numbers do not work, walk away. Let someone else win the bid. You will still be there in a couple of years to likely pick up the same property on.