I Almost Bought Properties at Auction (Here’s What Stopped Me!)
As you may have noticed in your local market, it is SUPER competitive right now to find good deals. This might be specific to our local market, but I have spoken to many active investors across the country, and the consensus is the same. It is hard to find a good deal. Well, I am of the opinion that there are always deals to find, but as the marketplace gets more competitive, you have to get more creative and resourceful.
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About two months ago, my husband Matt and I were looking ahead and realized that as a few projects closed, we were low on inventory and needed more properties in our pipeline. Currently, we buy property mainly through wholesalers, residential and commercial brokers, and the MLS.
Side note: For those who think the MLS is a complete waste of time, that is not always true! We actually just closed on a duplex in Trenton that was listed on the MLS. It was a HomePath property, so we had to monitor when investors could purchase the property. We did monitor it closely and bought it for below asking for $28k. It needs about $45k in work, and the ARV is $125k. Not a bad deal, right? Don’t dismiss the MLS!
Back to my auction story and lesson.We are currently buying a few different types of properties. We are actively looking for three types of real estate: (1) multifamilies (50+ units) in PA, (2) smaller multifamily and single family properties in our trading area of Mercer County to fix and either hold or sell to an investor, and (3) single family homes to fix and flip close to us that we can sell to an end buyer.
Since we have some ambitious buying goals right now, we knew we needed to try something different, so we decided to begin attending the local auctions — both county and city. This process has taught us a bunch of great lessons — one in particular that we want to share with the BP community!
Attending the City Auction
The first auction we attended was the local city auction. Here in the City of Trenton, they hold these auctions four times a year. They do a great job of listing as much information as they can about these properties. They also give time blocks to go and tour them. This is incredibly helpful and very different from some other auctions where you can’t even access the inside of the property before the actual auction.
They required a $150 registration fee for anyone who was going to bid on properties, as well as a 10% deposit on the purchase price, which was nonrefundable if you backed out of the deal. We went through the entire list of about 40 properties and made a short list of about four that we really wanted. There were two that we REALLY wanted — a commercial building close to some of our other buildings and a mixed use building across the street from another 4-unit we own.
As the auction began, there were probably about 100 people in attendance. It was a packed house! Right off the bat, we knew there would be a lot of competition. Something else to note, most of these properties at the city auction were properties that were completely dilapidated. Some of them had structural problems that we typically stay away from. That is why it is key to get into these properties before making a bid.
As the auction began, we waited patiently for our deals to be announced. Unfortunately, we lost in the bidding for all the properties we wanted! The commercial building ended up going for $65k, while our maximum bid was $40k. The mixed use building we really liked sold for DOUBLE our max bid! It was a feeding frenzy on every property, including the ones that were in really bad condition in bad neighborhoods.
Tip: If you decide to participate in auctions, determine your maximum bid AHEAD OF TIME, and stick to this number. Don’t increase your bid because of the competition. Remember, competition will always drive up prices!
Of course, we were disappointed that we did not purchase any properties at this auction; however, we brushed it off and decided to focus our energy on the County Auctions.
Moving on to the County Auctions
We decided to attend a couple of the County Sheriff Sales (Mercer County, NJ) before bidding. That was actually a smart idea. We became comfortable with the process and learned all about the environment we were stepping into. The way this county works is that they have a list (a 352-page list might I add) of all the addresses, the amounts due the bank, and the auction dates listed on their website. I actually printed this incredibly large document so I could begin to highlight which properties were listed for which date. The City Auction was a little easier for us. We know just about every street and area of Trenton, so it was easy for us to go through the list and see which ones we wanted to bid on and which ones we did not want to bid on. Bidding at the county level took a lot more research and fact finding.
For several weeks, we made a list of the properties going up for auction that week. We attended and talked to as many people as we could. Unlike at the city auction, you don’t have to pay a registration fee, but you do have to register if you plan on bidding. They also ask you to “show your money,” which I found very interesting. They want to see proof that you have cashier checks (or cash) to prove that you are for real. I saw one guy carrying around an envelope with what had to be close to $50k CASH inside it! I was floored that someone would feel comfortable walking around with that much money.
Once we got comfortable, we decided to begin bidding. We went three consecutive weeks and bid on multiple properties. We made a spreadsheet that included the address, the bank amount owed, the upset price, our maximum bid, ARV, bed/bath, square feet, and notes. (The upset price is the amount the bank is willing to accept to payoff their loan, and it's the starting bid. The bank might be owed $300,000, but the upset price could be $150,000.) The key is knowing what this upset price is prior to the auction.
The whole point of this game is to determine if you can buy below market.
Each week, I put a ton of my time into this initiative. I would list all the properties that were coming up for auction, I would determine if it was worth our time, and I would research on the MLS for ARVs and public records to learn as much as I could about the property. There were about 30 properties on our list. So you can do the math — it took me a while to do all of this research. During last week’s auction, there was one property that was a condo and the upset was $15k. This was an awesome deal, and the ARV would be $70-80k. Well, everyone else at the auction knew it was a good deal too, and it ended up selling for $50k (and our maximum number was $25k).
So yet again, we were not willing to move beyond our maximum bid and got outbid.
Key Lesson We Learned
After last week’s auction, I turned to my husband Matt and said, “This does not seem to be working.” He looked at me and agreed. First of all, when you attend many of these auctions, there are a handful of “players” in the room. These “players” make it their JOB to attend these auctions and have the inside track on this process and the properties. So, in a nutshell, we are competing with people who bid at auctions as their main JOB. Many of them bid against each other to just drive up prices. You are not going to get a “good” deal when you are positioned this way. Plus, you have to do an incredible amount of research to even determine what is a good deal and what is not a good deal. You can’t even get into these properties to verify anything. We decided we were not comfortable with this level of risk.
So after this realization and learning, we decided to do a better job of staying in front of the wholesalers we have bought properties from in the past on a more regular basis. This week, we reached out to key wholesalers and REO real estate agents whom we have worked with in the past and told them what we were looking for. They all had some deals in the works, so that is promising.
Additionally, one of the main “players” at the county auction is another wholesaler we have done business with and who is also one of our commercial tenants. Since we have done business with him before, we decided that if we buy auction properties moving forward. they will be through him. Instead of us doing all the research and putting all the time into the auction process ourselves, our time and energy is better spent getting in front of wholesalers to find off market deals that are less competitive.
We would rather pay this wholesaler or any other wholesaler their $2,500-$5,000 fee for a good deal instead of having to participate in the process of getting these deals under contract ourselves. Wholesalers spend a lot of time getting deals under contract. And they should get paid for their efforts.
The bottom line is how precious is your time? Everything else in this business is unlimited. Time, after all, is the one limited resource. No matter how experienced or how inexperienced you are in this business, you continually have to evaluate how your time is being spent and what the best ways to achieve your goals are.
[Editor’s Note: We are republishing this article to help out our newer readers.]
I am curious to hear your experiences. What real estate investing activities have you outsourced? How did it work out for you?
Thanks for reading and be sure to leave a comment below!