Going Once, Going Twice: How to Win at a Real Estate Auction
Hey there, BP! Today we are going to talk about a very different and non-traditional way to buy real estate – the real estate auction. There are different types of auctions out there. A sheriff sale is an auction facilitated by the courts to settle a foreclosure complaint. A tax lien sale is an auction of the real estate tax debt on a property, which can eventually become a foreclosure as well. Of course, there are other private sales to sell everything from bank owned property to abandoned real estate to estates of the deceased. All of these sales are typically in an auction format and can be a source of great deals for real estate investors.
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This past week, the City of Trenton (in NJ) held an auction, which was a sale of city owned property. These have been repossessed by the city for things like unpaid real estate taxes, abandonment and excessive code violations. Once a year or so, they auction off a handful of their properties to raise some funds and to spur development. The property prices start at $500 for small single family row homes that are in rough neighborhoods and pretty much "shells." They also auction off multifamily and commercial properties in decent areas with much higher price tags.
From my experience at the auction last week, I came up with 5 lessons to share with you. Here we go!
5 Lessons to Help You WIN at Real Estate Auctions
Lesson #1: Do Your Homework
When pursuing properties at auction, you may not be able to get inside for an inspection. This is normally true of sheriff sales. If that's the case, you want to do a drive by of the house, and if it's feasible, a walk around the exterior. You want to assess things like roof repairs and window condition, of course. You also want to look for signs of high expense items. Oil tanks are common in my playground of NJ, as are septic tanks and wells. Any of these will be costly to remediate, and you can spot signs of them from the exterior.
Also look at the overall property condition. I have found that if it looks beat up on the outside, odds are, it’s beat up on the inside too!
The second round of homework you may want to do is a title search. This applies most regularly to sheriff sales where you may inherit some of the other liens, so you want to know what those are. For the auction I was attending in Trenton, the properties would be delivered with no liens and a clean title, but I did confirm that before the sale.
For this auction, the City opened up all the addresses for a one-day site inspection. From 11 a.m. to 4 p.m., the boards came off the front doors, and we were allowed to do a walkthrough to assess the condition of the inside. We were seeking multi families and mixed use buildings in a specific area, so we narrowed down the auction list from 40 properties to 3 that we really liked.
The first property was in good condition in a nice area. The opening bid was $5,000. I told my partner that this one was going to get a lot of attention at the auction. We decided that the highest we would go was $20,000. The next address was a large commercial warehouse space, but it was in awful condition. The place was covered in mold, and there was a huge hole in the roof that had been there a while and allowed rain and the weather to have their way with the building from the inside out. The opening bid was $15,000, which seemed reasonable, but we decided that it wasn’t worth even that.
Lesson #2: Know the Rules
The last property was in an OK area — not great and not awful. The first floor was an abandoned bakery, and there were two apartments above it. To our surprise — and to the surprise of the City of Trenton — the two apartments were occupied! One tenant reported that he had been living there for 20 years and still sent his rent to the previous owner, who had lost the building to foreclosure to the City unbeknownst to the tenant.
On top of that, the bakery space was full of equipment and supplies. When the City took the boards off the storefront, the kind neighbors decided that it was a yard sale and started to help themselves to the equipment in the store. Within an hour of the City taking the boards off, a concerned neighbor called, and the City came back out to board the property back up again. We arrived just as they got to site, but were able to get inside for a quick walkthrough.
The storefront was in good condition, and the utilities for the apartments seemed to be intact also. We couldn’t access the apartments, but got a feel from the outside. We were the last investors to look at the place. One hour after the boards were taken off the doors, they went back on. Not all investors got to take a look at the building.
I checked the rules for the auction, which said that the properties were in “as is” condition, which meant that they came with the occupants and contents of the storefront as well. Because the properties had already been advertised publicly, the City had to complete the auction even if they had to put the boards back on it before 4 p.m. This wasn’t a stipulation in the auction docs. Because I was lucky enough to show up when we did and also researched the rules for the auction, we had an upper hand.
It pays to know other rules for auctions. I have been to some that require all bidders to pre-register or bring a certain amount of money to the auction in certified funds. There is usually a rule that requires that you pay around 10% of the purchase price of the property as a deposit at the auction as well. The City of Trenton used to have something called a “residency requirement,” meaning that if you purchased a single family home, you had to occupy it yourself for a certain period of time, thereby eliminating investors. That requirement has since been removed!
Bottom line: Before you go to the auction, read the fine print and make sure you are prepared.
Lesson #3: Keep Your Emotions Out of It
My partner and I arrived at the auction excited and prepared. Our first target was about 10 properties down the line, which in retrospect I’m glad for. It allowed us to take some time to case out the crowd and see who was “playing” and who just came to watch.
When our first deal came around (the one in good condition in a nice area), we were on the edge of our seats. It took all my will to not jump in with a start bidding right out of the gate, but I wanted to see who else was interested in this one. We sat on our hands and let a few people fight it out. Bidding opened up at $5000 and got up to $15,000 before people started to drop off. When there was only one bidder left, we jumped in.
There is a certain psychology to waiting to get into an auction. I have found that the opening bidders are looking to steal it at the lowest price, and they drop out soon. Those who jump in later are perceived to know what they are doing, regardless of whether that’s actually true or not. It can also take the wind out of the sails of the guy that just fought his way to get to the last bid, and then you come in to make him fight again! I should paraphrase that this is all my assessment of human psychology, and has no basis aside from life experience.
So we hopped in around $15,000, along with a few other investors who were also playing it slow. The bidding quickly got above our stop of $20,000, and we walked. Although I really wanted that deal, I didn’t let myself get caught up in the moment and go above my stop limit. It’s important to establish these things up front — because I can tell you that auctions are full of emotions. I have seen people bid well above a reasonable price, just because they got their emotions involved. If you have some stops set before hand and stick to them, you can separate yourself from the “heat of the moment.”
Lesson #4: Change the Game
The next deal we liked, the warehouse space with the hole in the roof, came up. No bids. The City simply had this one priced too high at $15,000 for anyone’s taste. We’ll come back to this property in a minute…
The last deal we liked, the one with the two tenants and the former bakery, came onto the auction block. I played by my same rule as above, and I waited for the bottom feeders to get out of the way. Once the crowd started to thin out, I jumped in.
The auctioneer was going in $100 increments, no matter what the bid amount. Most of the time, the bidders abided by this also. This was an “unspoken rule” for the auction. One way to throw people off their game is to find an “unspoken rule” and break it. When I jumped on this deal, I started bidding by increments of $500.
At first the auctioneer didn’t know how to take it. I would bid $10,000 and he would ask for $10,100. He would get it, and I would go to $10,500. People knew that if they went to $10,600, I was going to $11,000. A few people dropped out. After a few iterations, the auctioneer started going by increments of $500 also. We were at $15,000 by that point. As soon as he shifted, I went to increments of $1,000 to throw it off again. We ended up getting the deal for $21,000, well below our target!
Lesson #5: It’s Not Over When It’s Over
So let’s go back to the warehouse with the hole in the roof. It didn’t sell because the City had it priced too high. I bet they were basing their price on square footage, not condition. The property has potential, but it’s only worth a few thousand right now, if that.
If a property doesn’t sell at auction, that doesn’t mean it’s not still for sale. It’s worth approaching the powers that be after an auction to see if a deal can be made at another price. You never know ’til you ask!
We are really excited about the deal we got. The place needs work, but it has potential. We are hoping that the tenants want to stay, and we will of course let them know that they no longer need to send their rent to the prior owner!
People who have been around Trenton for a while told me stories about the bakery that was in that storefront. A lot of memories were created there, and we plan to put a new bakery in its place to keep that tradition going. We even found some old neon signs in the basement that we plan on having restored.
Auctions can be places to get very unique properties at a great price. You have to do lots of due diligence ahead of time, and you need to have your poker face on at all times the day of the auction!
Anyone else have some luck at auctions? Any good auction stories out there?
Give me some feedback so we can get a conversation going. Have a profitable week!