I’ve gotten to the point where I am ready to purchase my first property. I’ve researched the market, completed over 50 property financials to get comfortable with it, and have read numerous books.
I WAS NOT READY FOR WHAT I WITNESSED!
I found an auction about 2 miles from my house. Went to the house, did my inspection, and ran the numbers. Perfect! The numbers work!
Even with 50 ppl there i still felt good. Until the bidding starts.... The house was valued around $80k. I knew what my high number was, and that was surpassed on the third bid. Crap! I stayed to see what happened. Once the bidding hit $90k I left.
Why (and this might be my inexperience) would someone bid so much higher than the valuation?
That happens a lot with auctions. Sometimes people get caught up in the auction and winning. Other times to auctioneer has a bidder driving the price up. Some auctions even say they have that option to bid themselves.
@Lynnette E. I guess I’m just surprised by how many seasoned investors were there. Then again, it could’ve been a lot of unseasoned investors who are making all the bids.
I assume this was in Cincinnati, what township/neighborhood?
People will throw stupid money at a house for all kinds of reasons. Trying to figure out why they're doing what they're doing is often a lost cause, especially at auctions. The whole structure of the thing is designed to make you lose your bearings and overpay.
@William Durel I’m assuming this is in Cincinnati? If so, could you specify what type of auction it was ? I’m local of this area and I’m interested in auctions
Even though they may have overpaid, the cash flow could have still been very solid.
Also, you could have been off with your valuation of the property.
@William Durel sounds like you left at the right time. Way to stick to your research. If the valuation you did was correct then you made the right call for leaving. I wonder if the AMV made it worthwhile to rehabbers?
@Thomas Page this was in Clermont County in Amelia.
@Jim K. In my opinion someone definitely overpaid. And I know they are designed for that reason. I was just flabbergasted. That’s probably the best word i can use to describe it.
@Conn Gerrard this was a real estate auction. The personal property was auctioned off and then an hour later the house was auctioned off.
@Conn Gerrard and it was in Clermont Co in Amelia.
@CJ M. I reviewed the valuation that was placed and I asked a friend who is an agent what they thought the house could sell/rent for. Which is why i went. Renting it out for $1000 a month the cash flow at the valuation would have been about $200 based on taxes, mortgage and insurance. The houses ended up going for at least $15k above the valuation.
Based on the age and repairs needed I’d assume to flip there will need to be $20-25k put into it.
But again, this was my first auction so I’m assuming I missed a few things.
@Daniel Townsend I think even to rehab your looking at $20-$25k. The houses in the area that were similar were only selling for $115-$125ish.
@William Durel yeah that doesn’t seem to make much sense
Doesn't sound like a good deal to me unless there are some serious value-adds to value or something else we're not seeing. At best they'll probably see a 6-7% return.
Kudos to you for knowing when to fold your cards and walk away.
@William Durel It is likely that you made a mistake on the rehab cost, ARV, gross rent, cash flow, or all of the above. It happens. Don't feel bad.
It actually happened to me last month. I went to an auction with 34 properties. After an extensive analysis, I narrowed it down to 3 properties. The first of the three properties was the second home to be auctioned. Bidding started with me, then followed by 13 other investors. Woof.
By the time it got back to me the bid was above my max purchase price. OUT! The property then went up another $30k. I. Was. Shocked. Taking note of the winning bidder, I moved my attention to the next property.
This time it was only me and three other investors. Bidding again started with me. Two of the three other investors quickly dropped and long story short, I got the property for $5k less than my max.
After the auction I asked the winning bidder of the other property how they were able to justify that price and they told me their estimated rent was $100/month higher than I assumed. Their assumed ARV was $15 higher, and their estimated repairs were $10k lower. They two other properties in that neighborhood, so they had knowledge and systems in place that I didn't. Check. Mate.
That being said, you need to go into an auction with a few properties in mind, do your due diligence (including title / lean searches) and move on if it gets above your max purchase price. Getting emotional or caught up in the moment can get you into trouble. Putting all of your eggs in one basket (house) lessens your chances of a deal. Who knows, a feeding frenzy on a house at the beginning of an auction can be to your advantage. Investors that would be your competition could get discouraged after one property didn’t go their way and leave. :)
Keep at it! You can still find value at auctions, you just have to outwork the competition and have better input data.
I would think you might stick around to learn a thing or 2, even if you plan to make no more bids. It being your fist rodeo and all.
@William Durel welcome to the real world!
I done auction investing extensively during the bottom of the last crash in NYC, 1992-1994, and at the time, there were wall to wall auctions, so I attend several a week, and even several a day sometimes. In this business, it's a game of numbers, so if one auction doesn't work out, so what, I go to the next one.
I gone to court house step auctions, on site auctions, public auctions at a hall where hundreds are sold. My theory is if you go to enough of these, they'll be a fluke, and the payoff taking advantage of that will more than make up for all ones where you walk away with nothing.
I've been to on site auctions where I am the only bidder showing up. Most of the time, the auctioneer will ask if I want to submit an offer. I often say yes, submit my low bid, and later receive a letter saying it doesn't meet the reserve price.
There's an auction held at a condo complex where I previously bought two at auction. Condos that sold in better times for $120K were auctioned off for $40K. I did not attend this particular one but my sister was there. On the day of the auction, the condo owner and his twin brother was there, along with a group of spectators. The auction started but no bidders. The auctioneer then ask if anyone cares to put forward a bid. The owner's twin brother raised his hands and said "I would if you'll consider $5,000". The long and the short of it was his bid was finally upped to $8,000 taken, asked if he had cash or credit to cover, and he had $8,000 on his credit card, bought the condo for $8,000 that his brother originally paid $120K for. Couldn't believe no reserve price established for this auction. I didn't believe the story my sister told me at first, but later got a letter from the HOA requesting an amendment to the CC&R giving them the right of first refusal to prevent these ridiculous sales taking place that skews the value of the condos.
I said if you do enough auctions, you'll find a fluke, and this guy paying $8K for a $120K condo is definitely a fluke.
There's another auction I attended for a coop. Started with 4 bidders, finally to two, between an old couple, and a young girl. Nothing major, the bidding ended at $23K, the young girl lost, started crying. A dozen people attended, and 3 of them went up to the girl, spoke to her, and the crying turned to smiles. I ask one of the guys who spoke to the girl what happened. Turns out the guys approaching the girl each have coop units in the same building for sale, and explained to her the older couple over paid. Believe the older couple heard the discussion and looked quite unhappy. The story I got was there was a coop conversion, and wholesalers bought groups of these coops from the sponsor for about $15K each and reselling, and this foreclosure took place in the middle of it. Said they can sell to the girl for $20K. Yes, confusing but that's the way the world work sometimes.
Yep, at auctions, you often have people either over paying, or underpaying, and some walking away either mad and others exhilarated.
@Frank Chin I’m definitely going to go to a few more with an open mind. I’ll likely just watch and study the auctions for a while unless I can get a house really cheap. Definitely lots to learn there though.
@William Durel we were at the same auction and had a pretty similar buy number as yours. It's likely/possible that an owner occupant bought it.
@Sean Cole I did hear several people there saying they wanted the house for their kids. So it’s likely.
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