Auctions for Newbies?

25 Replies

As I'm looking for deals as a new investor, a lot of houses that at least superficially meet my criteria are being offered at public auction. I have not done a deal yet, and am somewhat intimidated to try and get my first deal that way. Curious to other people's thoughts on a first time investor finding their first deal at auction? Thanks in advance!

I have found auctions to be very difficult because first you have to purchase the properties for all cash and also they tend to change the auction dates all the time.

Also - auctions tend to have a lot of fees and if you’re thinking of flipping the homes many of times the auction homes do not come with clear title.

I bought my first house at auction. I like auctions, there is no negotiating. 

Keep in mind you must have cash or know exactly how you are going to pay. You cannot get an auction purchase finance in time. You often do not have access to the house to get appraisals etc. 

Now most people equate auction to courthouse step foreclsoue auctions. Not all auctions are foreclosures. Many auctions are on site and you hav the ability to go thhrough and inspect the house fo 15-30 min beforehand.  This is appropraite for 1st timers.  

Courtouse step auctions come with risks many new investors may not understand. Don't try then until you understand the risks and how to do the appropriate research.

I bought my first flip on the courthouse steps.  High risk, high reward.  75% of properties never make it to auction (at least in my area).  I suggest doing full blown title search (around $200-$400) if you're planning to bid.  Pros- less competition because you need to pay all cash.  Cons- possible unknown mechanical/lien issues and an off-market property is hard to get a peek at prior to auction. Good luck!

@Ned Carey I’m confused by the vocabulary used for auctions. There’s 3 types: 1. Auction with someone announcing a house surrounded by people and he speaks really fast, you know what I’m talking about. 2. Auction.com where you can bid on a house and pay it all cash. 3. Courthouse steps for foreclosed homes. All these 3 are referred to as “Auctions” as far as I know. Is this not true? Differences between all of them?

@Matt Watkins

I studied the foreclosure auction process for my county and city for eighteen months before I made my first successful auction buy, and my city's one of the easier ones to learn, as this is a judicial process state with a traditional sheriff's sale process. I learned a great deal about how things work here in my county, and I wouldn't trade the experience for the world. 

But Matt, if you go in there and try to do this thing half-baked, you're going to get hammered into the ground. I wouldn't say the small cadre of frequent buyers at the auction here are sharks, as others do. But they are real estate professionals, many with formal research and investigation backgrounds and all with million-dollar pockets, and casual here-today-gone-tomorrow looky-lookies are not going to compete successfully with them.

The best advice I've ever heard about spending money at the auction went something like this: if you can't afford to drop the money you've budgeted to spend at the auction in a pile on the sidewalk and burn it right there, if your business model can't survive that, don't bid.

Again, I would say a real estate auction is a great place to learn a lot about real estate by studying and watching, but it's not a place to learn by trial-and-error.

Best of luck to you.

Originally posted by @Antoine Martel :

I have found auctions to be very difficult because first you have to purchase the properties for all cash and also they tend to change the auction dates all the time.

Also - auctions tend to have a lot of fees and if you’re thinking of flipping the homes many of times the auction homes do not come with clear title.

 If you buying at a courthouse sherrifs sale there are no fees.. when you buy from Auction .com sometimes there are buyer premiums and normal escrow fees.. and you do have to be careful on title.

Originally posted by @Sergio Aguinaga :
@Ned Carey I’m confused by the vocabulary used for auctions. There’s 3 types: 1. Auction with someone announcing a house surrounded by people and he speaks really fast, you know what I’m talking about. 2. Auction.com where you can bid on a house and pay it all cash. 3. Courthouse steps for foreclosed homes.

All these 3 are referred to as “Auctions” as far as I know. Is this not true? Differences between all of them?

you have it right 

1.. public auctioneer who is selling properties for a bank or individuals and normal escrow process happens after winning bid..you will have time to inspect to do due diligence etc..  usually need to put up a decent check to get a bidders paddle. don't buy anything you get your deposit back.

2. Auction.com just an on line version of # 1  bid on line.. put up a bidders fee up front.. win the bid and you have time to do a normal escrow although some of the homes are occupied and they instruct you not to approach the house.. U can play that any way you want. these are homes that have been foreclosed and are now bank owned.

3. Sherrif sale or trustee sale  … courthouse steps.. IN GA they are once a month and its quite the show.. you need to do your own title search up front.. to be successful you probably have to follow 50 homes that month figuring 48 will postpone redeem .. wholesaler got to them they renegotiated with the bank etc.. virtually impossible to just hone in on one home..  then in GA it can take 60 to 120 s to get your sherrif or trustee's deed.. I bought 54 of them one year in in 2013.. and that was very frustrating.. now the local custom is once you bought you can move for eviction and reno etc. but you do risk doing reno and some how the sale gets overturned your SOL on your reno work..  

Originally posted by @Jim K. :

@Matt Watkins

I studied the foreclosure auction process for my county and city for eighteen months before I made my first successful auction buy, and my city's one of the easier ones to learn, as this is a judicial process state with a traditional sheriff's sale process. I learned a great deal about how things work here in my county, and I wouldn't trade the experience for the world. 

But Matt, if you go in there and try to do this thing half-baked, you're going to get hammered into the ground. I wouldn't say the small cadre of frequent buyers at the auction here are sharks, as others do. But they are real estate professionals, many with formal research and investigation backgrounds and all with million-dollar pockets, and casual here-today-gone-tomorrow looky-lookies are not going to compete successfully with them.

The best advice I've ever heard about spending money at the auction went something like this: if you can't afford to drop the money you've budgeted to spend at the auction in a pile on the sidewalk and burn it right there, if your business model can't survive that, don't bid.

Again, I would say a real estate auction is a great place to learn a lot about real estate by studying and watching, but it's not a place to learn by trial-and-error.

Best of luck to you.

Out west we would bring 2 to 5 million in cashiers checks to the sale on any particular day.. that's what you needed to be a for real foreclosure investor.. in CA double or triple that.. its exactly as you state.. its a big money game.. now I have bid in PA and Ohio as well as IN  little more complicated.. but for us the price points are so low.. as to be very small risk if we mess up.

out west you hand a 500k check over .. and one it aint coming back if you messed up.. I loved it.. and yes there is a cadre of the players and it can be tough for the one off to bust in.. 

in a normal sale out our way there are 30 to 50 people handing around and 1 to maybe 5 props will get sold with the same 5 people buying them 90s of the time.. if they don't buy them they simply did not want them.. the person who beats us out those the person looking to live in it.. or sometimes land lords who think buying 5% under market is a great deal.. they will win the bids.  but very few properties are sold out our way for buy and hold its all flip.. simply because renters don't really rent houses as much they rent apartments. 

@Jay Hinrichs

In the Allegheny County sheriff's sale, what I couldn't get over were the amateurs looking for flip deals. It was amazing is how often they'd walk in with a pile of papers, and just keep bidding on ONE property far, far, far over what the experienced buyers were willing to pay for it. You'd never seen them before in the room and here they were confidently throwing around money like magnates.

So then they'd put in the winning bid and bounce up happily to pay their 10% and you KNEW you were watching a trainwreck happen right in front of you, and the five or six real players with their little leather pouches filled with banded stacks of hundreds just sat there and impassively watched the sheriff's sale break another wannabe. And this would happen month after month after month. It was surreal.

Originally posted by @Jim K. :

@Jay Hinrichs

In the Allegheny County sheriff's sale, what I couldn't get over were the amateurs looking for flip deals. It was amazing is how often they'd walk in with a pile of papers, and just keep bidding on ONE property far, far, far over what the experienced buyers were willing to pay for it. You'd never seen them before in the room and here they were confidently throwing around money like magnates.

So then they'd put in the winning bid and bounce up happily to pay their 10% and you KNEW you were watching a trainwreck happen right in front of you, and the five or six real players with their little leather pouches filled with banded stacks of hundreds just sat there and impassively watched the sheriff's sale break another wannabe. And this would happen month after month after month. It was surreal.

or in our area when someone bought a second  for 100k on a 300k home thinking they got a home run only to find out it has a first of 300k... and they just lost the entire sum..  

Originally posted by @Jay Hinrichs :
Originally posted by @Jim K.:

@Jay Hinrichs

In the Allegheny County sheriff's sale, what I couldn't get over were the amateurs looking for flip deals. It was amazing is how often they'd walk in with a pile of papers, and just keep bidding on ONE property far, far, far over what the experienced buyers were willing to pay for it. You'd never seen them before in the room and here they were confidently throwing around money like magnates.

So then they'd put in the winning bid and bounce up happily to pay their 10% and you KNEW you were watching a trainwreck happen right in front of you, and the five or six real players with their little leather pouches filled with banded stacks of hundreds just sat there and impassively watched the sheriff's sale break another wannabe. And this would happen month after month after month. It was surreal.

or in our area when someone bought a second  for 100k on a 300k home thinking they got a home run only to find out it has a first of 300k... and they just lost the entire sum..  

The more you cry the less you piss...we had a lot of that, too. Aim higher on the lien ladder next time!

I have $0 marketing budget and primarily buy on the courthouse steps at Trustee Sales.  "Caveat Emptor" and do your homework.  You must be familiar with researching title to make sure you are buying 1st lien position.  With that being said it is a great source to buy at and you must have plenty of liquidity.  Also Auction.com is a Trustee to many banks so they'll be at Trustee Sale as well.  In the area I buy at there are plenty of people but few bidders.  Best of Luck!!

@Matt Watkins

Trustees sale buying accounts for 90-95% of my purchases. I've seen a lot of hopeful amateurs come and go over the years. A few common mistakes that I see them make:

1. Not researching title properly. Unknowingly buying a junior lien, a property with tons of back property taxes due, or with deed issues that effect marketability or transferability will tank you. You need a relationship with someone at a title company who will be willing to run TONS of properties for you. 

2. Underestimating repair costs. Allow for everything you can see, and then allow some more for things that you can't. There will be some. Also, if the property is occupied (and most auction properties that we buy are), then you'll have to allow for a possibly long and expensive eviction process.

3. Getting attached to a particular property. Auction buying is a very low success rate operation. If you go out for a single property, you're most likely coming home with nothing. The vast majority of auction properties set for a given day postpone, cancel, open at too high of a number, or get bid too high even if they open reasonably. You will need to have a ton of properties in mind to walk with one (and you will have to have researched and ran your numbers on all of them).

4. Getting married to the opening bid. This number bears no relationship to what the property may actually sell for. If you show up assuming you're going to buy the property at this price, you're probably wasting your time.

5. Not sticking to (or knowing) their numbers. Auctions can be exciting. They can be emotional, particularly for an amateur. There can be a temptation to not let someone "take" a property from you, but you must stick to your precalculated maximum bid and walk if bidding exceeds it.

If you are buying at non-foreclosure auctions beware of reserve or seller approved pricing. I have had clients purchase at these auctions thinking they would own the property with the winning bid only to have the auction company call and inform them that the reserve was not met or the seller didn't approve the price, then demand a higher price or their bid would be canceled. 

Trustee auctions are true auctions (at least here) but I don't recommend them for newbies. There is no practical way to get title insurance, so if you miss something you're in a bad place. Many auctions are canceled or postponed within the last couple of days, so you don't have much time to research them unless you want to do a whole lot of work for canceled properties. The interiors are usually not accessible so there is no way to know the condition let alone do any inspection. Unlike on TV, many of the homes purchased through a trustee sale are still occupied by sometimes very angry people that you will have to negotiate with or evict. 

I have bought many properties out of trustee auctions in Arizona over the past few years, but I have stopped recently because the HGTV and weekend seminar people have pushed up prices to a ridiculous level. I can purchase homes out of the MLS with title insurance and an inspection for the same that many people are paying at the auctions.

Originally posted by @Sergio Aguinaga :
@Ned Carey I’m confused by the vocabulary used for auctions. There’s 3 types: 1. Auction with someone announcing a house surrounded by people and he speaks really fast, you know what I’m talking about. 2. Auction.com where you can bid on a house and pay it all cash. 3. Courthouse steps for foreclosed homes.

All these 3 are referred to as “Auctions” as far as I know. Is this not true? Differences between all of them?

 Yes they are all auctions and you described them well. A true foreclosure auction (#3) normally happens on the courthouse steps. Any kind of property can be sold via an online auction  (#2). You have to know the terms and what you are buying. The terms may be different for different sellers, so buyer beware. I am not a fan of online real estate auctions. 

That last type (#1) is the best for most newer investors. You go so see the house and inspect inside. Then the auctioneer states calling the auction with a crowd of people around. Any kind of property can be sold this way; Foreclosures, estate sales, attorney ordered sales for a variety or reasons, and simply investor to investor sales. I often sell and occasionally buy this way. 

With any auction, you need to know the terms of the sale. You need to know what rights you are buying and if you are guaranteed marketable (or insurable" title.  Auction terms tend to be the most stringent terms of any type of purchase.

Originally posted by @Jesse Campuzano :
What auction online would you recommend Dallas tx area

I don't do business in Dallas so I would not be a good judge but my hunch is NONE. Online auctions tend to be the least transparent of sales auctions or otherwise.

Originally posted by @Ned Carey :

I bought my first house at auction. I like auctions, there is no negotiating. 

Keep in mind you must have cash or know exactly how you are going to pay. You cannot get an auction purchase finance in time. You often do not have access to the house to get appraisals etc. 

Now most people equate auction to courthouse step foreclsoue auctions. Not all auctions are foreclosures. Many auctions are on site and you hav the ability to go thhrough and inspect the house fo 15-30 min beforehand.  This is appropraite for 1st timers.  

Courtouse step auctions come with risks many new investors may not understand. Don't try then until you understand the risks and how to do the appropriate research.

 Would you be able to expand on the risks of courthouse steps auctions for us newbies to consider?

@Brian H.

Would you be able to expand on the risks of courthouse steps auctions for us newbies to consider?

Courthouse step Foreclosure auctions are not something I have done. I certainly don't know the laws in your state. The most important question is; are you guaranteed free and clear title if the foreclosure was done wrong or are you on the hook for any mistakes?

Another important question is; Are you buying the right of a second mortgage foreclosure, meaning you still have a first mortgage in front of you that remains on the property?

Most of my transactions have been through the auctions from experience I can tell you the auction is higher holding costs in comparison to MLS reason being by the time the occupant leaves it cost money (cash for keys) and time( property taxes )