auction sales
Sunnyvale, CA · Member since 2013 · 2 posts · 1 vote
auction sales
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes@Leila Moose welcome to BP! Good to see another Bay Area investor on the site.
Buying at auction is an advanced game. There are all sorts of things that can trip you up, many of which are discussed in the Trustee Sales FAQ.
Your biggest risk is title. Buying on the courthouse steps isn't a purchase transaction as much as it is a legal transaction. You are only buying the legal position that was held by the lender that is foreclosing. In other words, if the foreclosing loan is a line of credit that was recorded after a first mortgage, you still have to pay off the first mortgage if you buy this property at the foreclosure sale. I've lost count of the number of times I've seen someone buy a second lien thinking that they were purchasing clear title. There are other title "gotchas" besides senior liens.
The second largest risk is property condition. Many of the properties are occupied, and you don't get to see the inside, nor obtain inspections, get a pest report, etc. The occupants might have destroyed the inside of the property, or might destroy it after you buy it, before they leave. Just a month ago I got outbid on a house by an inexperienced competitor. A few days after the auction, the occupant filled the house with natural gas, lit a cigarette in an attempt to commit suicide, and blew the house to smithereens! Somehow she survived, the house didn't, and I suspect this may be an end to the buyer's auction buying business.
Title risk can be overcome if you are an expert at interpreting the condition of title and doing a title search. You can pay someone to do it but if they miss something it will be your money lost, not theirs, so be careful about trusting others with title. The practical challenge with paying for this service is that your time frame to obtain the title report is very short, and the list of properties can be long, and to make matters worse most of the properties that you pay to title search don't actually go to auction, they postpone or cancel.
I don't mean to sound like a downer on this business--I've made my living in this business for over 20 years--but I've seen too many people who are unprepared for the risks lose their life savings. And countless others approach the task casually and fail because they don't have the sophisticated systems needed to succeed in a chaotic and risk-laden process. Just be careful, if you aren't buying in significant volume you can't afford to make a mistake that wipes you out.
41 Replies
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@?Leila In CA a prelim will give you a great feel for the property.
However its not practical to order a pre lim on every potential property. If your truly talking about foreclosure auction property.. So few properties actually go to sale.
Pretty tough going in the bay area for this activity. If you do not have MILLIONS behind you.. The competition does.. If you have enough cash to buy a Sunnyvale foreclosure ( which there probably are not any) but I would seriously look at getting into the debt side.. IE private lending with Experinced operators you will make more money in the long run safely.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
PS I graduated from Cupertino High back in the day
- 12yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Leila Moose welcome to BP! Good to see another Bay Area investor on the site.
Buying at auction is an advanced game. There are all sorts of things that can trip you up, many of which are discussed in the Trustee Sales FAQ.
Your biggest risk is title. Buying on the courthouse steps isn't a purchase transaction as much as it is a legal transaction. You are only buying the legal position that was held by the lender that is foreclosing. In other words, if the foreclosing loan is a line of credit that was recorded after a first mortgage, you still have to pay off the first mortgage if you buy this property at the foreclosure sale. I've lost count of the number of times I've seen someone buy a second lien thinking that they were purchasing clear title. There are other title "gotchas" besides senior liens.
The second largest risk is property condition. Many of the properties are occupied, and you don't get to see the inside, nor obtain inspections, get a pest report, etc. The occupants might have destroyed the inside of the property, or might destroy it after you buy it, before they leave. Just a month ago I got outbid on a house by an inexperienced competitor. A few days after the auction, the occupant filled the house with natural gas, lit a cigarette in an attempt to commit suicide, and blew the house to smithereens! Somehow she survived, the house didn't, and I suspect this may be an end to the buyer's auction buying business.
Title risk can be overcome if you are an expert at interpreting the condition of title and doing a title search. You can pay someone to do it but if they miss something it will be your money lost, not theirs, so be careful about trusting others with title. The practical challenge with paying for this service is that your time frame to obtain the title report is very short, and the list of properties can be long, and to make matters worse most of the properties that you pay to title search don't actually go to auction, they postpone or cancel.
I don't mean to sound like a downer on this business--I've made my living in this business for over 20 years--but I've seen too many people who are unprepared for the risks lose their life savings. And countless others approach the task casually and fail because they don't have the sophisticated systems needed to succeed in a chaotic and risk-laden process. Just be careful, if you aren't buying in significant volume you can't afford to make a mistake that wipes you out.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
- Flipper · Irvine, CA · Member since 2013 · 349 posts · 45 votes12y
Well said @Brian Burke , when I was starting out, I was at the courthouse steps in Southern Cali every morning for 6 months. My biggest worry was title, so verified title on certain amount of properties I was interested in. At the end I did not end up buying at the courthouse steps because auction prices was not significantly lower than retail.
- Investor · Pleasanton, CA · Member since 2013 · 59 posts · 13 votes12y
Hi Leila,
I agree with the above comments. Buying at auction can be very risky unless you know what you're doing. I would pay a seasoned player at auctions to do the research for you. They have access to lien and title research that the average investor does not have, unless you have the resources yourself. Also, very few properties actually make it to auction. Novices bid up the prices on such few properties in N. Ca. I, personally, leverage the experts. They can go in and check out a property on a moments notice when a last minute opening bid is put out there. I can't do that. Also, you might get a tenant occupied property that does not want to leave and is a "tenant for life" as in some areas of N. Ca. Risky business-my suggestion is go with the experts and learn from them.
- Sunnyvale, CA · Member since 2013 · 2 posts · 1 vote12y
@Margo Roberts @Brian Burke
Thanks for the advice! I know it is risky but I saw people got really good deals...
I do not mind tenants occupied or condition as long as they are not in rent-control area.
But I do want to learn how I could obtain the most comprehensive title search. in terms of finding an "expert", where do I start and how do I find out if this person can do a last minute check? Thanks!!!
L
- 12yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Leila Moose I wish I could be more help to you but that's a very tough question. I suppose you could ask around at your title company to see if they know anyone. I can only tell you what I did: I did my own title work for years because I spent five years learning how to title search before putting money on the line, and I didn't want to trust anyone else despite how skilled they claimed to be. Finally when my volume was too high to do it myself, I hired a former chief title officer that worked for a local title company that had 20 years experience. I then spent months training her how to search titles of foreclosures my way (even chief title officers don't always know the ins and outs of buying at an auction).
To make matters worse, many title searchers these days have spent their entire careers searching title using a title plant where they punch in the AP number or address and the system spits out a report showing the liens on title. Some don't know how to search title by hand anymore. You have to find someone old school. Why? Title plants can have incorrect and/or incomplete information. That is why you see escrow instructions that require the seller to certify that there are no additional liens on the property that don't show on the prelim. It's their hedge against inaccuracies and gives the title company recourse against the seller in the event that they missed something. Buying at an auction, you have no such hedge, nor do you have the title insurance (which is their hedge of last resort against title plant inaccuracies). All you have is a loss.
My point is that your money is on the line, not theirs and their mistakes will cost you. If you don't know how to search your own title, you won't even know if they mess up until it's too late.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Brian I learned to do title search's by hand at Lake county title co. up at Clearlake.. I would walk in with a Sandwich for Bob the examiner and they would let me back in their plant and we would open the books and go through each property I was interested in.. It also cost me a few 49er tickets over the years as well.. And to be fair my Dad was the largets buyer and seller of Land and subdivision lots at the time in that county we closed over 800 transactions one year.. So I don't want anyone to think you can just waltz into a title plant and get this kind of attention. But there is nothing finer in my mind then grabbing those big ole books cracking them open and looking back into history..
Today I cheat I call Chicago title customer service and like you said I get a date down on the phone.. Other than Senior tax deferral here in Oregon I have not had any issues. In my Timberland buying days I had a few easement and land lock issues.. However anyone who has made a title claim knows that title companies do not settle easily.. they will look for any out they can.
As I have posted on other threads My Dads RE attorney in Oakland told me when I was 16YO if you want to make money in RE you go learn the court house and how to search properties.. When I bought my first shadow plat ( 5 acre tract that had 110 lots underneath it) and we did pretty darn well on it I knew that was the way to go.
When I did what you do back in the 90's and early 2000's my competition at the court house would spend hours doing search on one or two properties only to have them redeem or opening bids to high. Most folks get discouraged.
I like you had a full time employee that created my data base we had every foreclosure in 4 counties in our data base and all bids and postponements were tracked.. The best deals were the private attorneys. Up here in Oregon the big foreclosure mills are on the WEb and it took a lot of the advantage to larger companies away and made it much easier for laymen and newbies to come into the deal.. Northwest Trustee service up in Seattle was the first to go live on the web..
When mothers pushing their baby strollers show up to bid and have half a million in cashiers checks I new I needed to get on the lending side of things. :)
- 12yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
You're absolutely right, @Jay Hinrichs . I just hate to see those mothers pushing strollers lose their entire life savings on an auction bet, and I have actually seen that happen. I practically begged this one lady not to bid on a house because if she did, she would lose every dime she spent. She thought I was just trying to jack her into not bidding so she ignored me...and lost it all. It's just sad, so when someone who knows nothing about how to search title wants to bid at the auction without any clue what they are doing, or wants to blindly trust someone else with their title work, I still keep in the same spirit as I did with that poor woman at the auction. Most will ignore me, and that's fine...some will succeed, and some will get wiped out, but at least I can sleep at night knowing that I did what I could.
I've bought hundreds of homes at auction, and one in a hundred results in a huge loss for one reason or another. Not the end of the world to me, I can absorb that. If you buy 2 to 3 per year at the auction, and one of those happens to be the 1 in a hundred case...it'll wipe you out and you'll have little chance to recover.
I've seen literally hundreds of bidders at the auction in my 25 years of bidding, and the vast majority don't last long. I have this long list of horror stories that if told would discourage most from engaging in the auction biz. But there is another side to it, and you pointed it out, Jay...if you want to really make money in this business you must learn how to navigate the courthouse. For me the upside has far exceeded the downside, but it's by design, not by accident.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
to swap war stories. I watched one guy buy a second on a home that the first was going 30 days later.. He went in and rehabbed the whole thing I bought the first and of course he was wiped out.. I paid him for his cost of materials for the rehab as a peace offering. But most would have just said tough luck.. Auction sales as you state are not very easy and they take millions in capital to really be successful.. At least on the west coast. That is why in every county there will be a small Cadre that control most of the sales... Do you remember Al Florida and Shep over in Alameda county. They had an office next to mine in Oakland when I had Langer mort. those guys would show up in their Rolls Cash in a suite case along with 45's it was very intimidating if you wanted to buy a Oakland property and they wanted it.
- Real Estate Agent · Orem, UT · Member since 2012 · 164 posts · 49 votes12yJay Hinrichs Auctions. If I had a time machine I definitely would have done things differently when I bought my first in 1998. The Wild West of courthouse steps is a wild ride but very few survive, that's for sure. Better ways to re invest I know believe
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
I would definitely heed @Brian Burke and @Jay Hinrichs words of warning about jumping into the auction businesses without a lot of technical and procedural knowledge about all the potential way to get burned - and to do it correctly. There are people that spend years focusing on this market and building systems to master it (hint hint Brian!). And if you don't know who the sucker is at the table.. it just might be you!
I don't mean to discourage by any means, but just a word of caution, as in anything you decide to invest significant money or credit on, be sure you understand the potential pitfalls of the market. Getting a property inspection and escrow company for a purchase on a normal sale has a different world of pitfalls that an auction can have.. Having said all that, I'm sure there are great resources on here to get started learning if you choose that route, and good luck!
- Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes12y
@Leila Moose I've been buying many of my project houses through our local sheriff's auctions, starting in 2004 and have had done well with it. I had some luck and experience on my side though, I was able to get an education from several other investors who I knew that had been playing the auction game successfully for many years and they showed me so many of the many ins and outs of buying at the auction. I'd certainly second the advice from @Brian Burke and I'll add a few more thoughts of my own.
If at all possible, find someone that knows your local auction biz well and learn from them, both the major and minor details. Auction procedures vary from state to state and even from county to county. My advice is based upon how things work here in my area-Milwaukee, WI.
I'm able to subscribe to a local business newspaper that offers a special subscription service for auction buyers. Our Milwaukee County auctions are Monday mornings, so each Thursday this paper emails out an Excel spreadsheet listing each house going through the following Monday and the details on each one including the amount owed, the debtors name, address (obviously!) case number, the law firm handling the sale, etc. Pretty much everything is on there EXCEPT for the most important detail, the opening bid!
What I do is take that list and go through the addresses and eliminate any that I know I'd have no interest in, which for me is generally just the really rough parts of town, other than that I'm at least open to taking a look at anything in the county. Then I get the opening bids for each house. Around here, we have two law firms that usually handle about half or more of the foreclosures each week between the two of them and they're nice enough to post the opening bids on their websites, although they won't usually post them until late Friday afternoon. The rest of them are usually split between about 10 other law firms and for those bids you have to call each firm and ask for them.
Once I have all of the opening bids, then I go through and assess each one to see if the bid is low enough to possibly make sense for buying. I'm a realtor as well, so I'm able to use the mls for my research. Generally, I'd say that each week I eliminate 90-95% of the properties as possibilities when I do my research, the bids are all too high to make any sense to buy for a project. Each week however, there are usually a few left that MIGHT make sense, so those are the ones I need to take to the next step, the drive by!
Sometime over the weekend, I'll drive out and attempt to check out each of the ones left that might make sense to buy. I say "attempt" because as has been mentioned already on here, its very unlikely that you will be able to get inside of any of them, so the inspection has to be done from the outside. On top of that, sometimes they are still occupied and the occupants, not surprisingly have ZERO interest in letting some potential buyer inside for a look. Its still worth a shot though and I'll usually knock on the door and see what happens, I have been let inside a few times. One trick I've found that often works is if its rented to a tenant and not owner-occupied, the tenants will sometimes let me in. I'll say, "hey do you know that this place is going through the auction on Monday?" and they never have a clue about it! I'll explain to them that one way or another, the owner is going to probably lose it in foreclosure and I might buy it, so if I could take a quick look around that I'd really appreciate it. I also add that I'm a good landlord that treats his tenants fairly and that might not be the case with other buyers, who may want to get new tenants or may just be jerks! So, letting me inside could really benefit them if I do buy it! Once inside, its the usual quick inspection like with any other house, my main concern is the basement condition, something which is nearly impossible to gauge from the exterior.
Chances are though that I won't get inside any of the houses each week, so its got to be based on what I can see from the exterior and if possible, from peeking in the windows. There are other regular auction buyers around here known for breaking in to auction houses, something which I won't do, I'm not going to jail for trying to inspect a house!
After the on-site inspections are done, I'll reassess my estimates of the current and possible fixed up values of each one left and see if it still makes sense. The next step is the title work, I have a connection I found or developed over the years who works for a title company who does the title work for a great price. Assuming they all come back clean from his research, then I will look again at my info on each house and set the maximum amount I would pay for each one.
Monday morning means going to the bank for cashiers checks because this auction requires 10% down either cash or cashiers check made out to the sheriff, IMMEDIATELY after bidding ends for each house. If you don't have the money/check right then and there, they will simply cancel the bids and start it over again right away.
Of course, for any house that looks like a deal, there's always the good chance that someone else sees the same thing and it will get bid up, up, up ,up! That's one reason why I prefer middle and upper market projects, less competition to buy them!
Finally, after you "win" the bidding and pay your 10%, they'll set the date for the confirmation of sale hearing, usually 3 to 6 weeks after the auction date. The confirmation hearing is usually just a rubber stamp for the sale, although I have heard of a few getting tossed out over the years, not sure for why. At the confirmation hearing, that is when you must pay off the remaining 90% of the balance or else you lose the property and likely part or all of your 10% deposit!
So, that's our auction experience around here, in a nutshell!
- Rental Property Investor · Baltimore, MD · Member since 2014 · 8 posts · 2 votes12y
@Brian Burke and @Jay Hinrichs -
I've read your posts and wonder what you think of this. An investor has agreed to mentor me and my husband. This investor buys at least 2-3 houses a day at auctions. I see that you mentioned many get discouraged with bidding at auctions and the risk is great. Do you think we will be safe learning from him? We don't have any money so he hasn't asked us for any. Right now, my husband bird dogs for him to research the properties he's interested in (15-25 properties a week) and we are currently in the process of him training me to bid on his behalf at the courthouse steps. Please let me know what pros and cons you see with this arrangement.
@Robert Taylor seems you've had some success doing it this way?
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes12y
@Natalie M. No possible better way to learn!
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Good way to start and learn the bizz from the ground up.. Most investors pay for those services so I think you should be compensated for your time.
Although the foreclosure business is cash intensive.. Unless of course your buying super low end stuff in the 5 to 30k range... But what us on the west coast think of as price points and the auction bizz requires REAL capital IE Millions in liquid funds 5 to 10 million minimum if your going to make any real money. Then the hard work the systems etc.
- Rental Property Investor · Baltimore, MD · Member since 2014 · 8 posts · 2 votes12y
@Jay Hinrichs Makes sense. I'm in Baltimore and I haven't seen this particular investor put up anything close to a million at an auction. 10k-40k mostly.
- 12yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
I agree with Wayne and Jay, having a successful and active professional show you the ropes is the best way to learn. It's also a rare opportunity, most guys like that wouldn't take the time to breed their own competition.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
very good point Brian there is a certain amount of friendship between bidders ( at least here in Oregon) but its like playing poker you keep things close to your vest. And in this bizz the last thing your going to do is educate the general public on the nuances in your market and create your own competition. At least in our market were its uber competitive
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
Leila,
Apparently, Jay and Brian have been a round the block too many times. If you want to learn how to buy trustee sale properties, there is a master in SoCal. Most of the courthouse steps buyers are his alumni. It's a 3-day class for $5,000, which is chump change compared to the knowledge you gain from him. You will make it back just on one deal.
@Rick H. knows him well and hangs around his forum to answer questions. Unfortunately, the trustee sale market has completely dried up. Competition is fierce for whatever goes on sale. You can learn now, but will not get to use it until the next downturn, which could be 5-7 years from now.
Best of luck.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed
made some of my best foreclosure buys in the good times.. 03 to 06... pay close to retail by the time I get done rehabbing the property went up 75k ...Always deals but its crazy competitive as you state.
- Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes12y
@Natalie M.-sure, I'd also agree that if you have someone that TRULY does know the ropes and is willing to really show you, I'd say go for it, what do you have to lose?
One thing to keep in mind though is that even if you do learn all the ins and outs, it takes a nice stack of cash you can afford to lose if worse comes to worse, to really play in the auction game.
- CLERMONT, FL · Member since 2015 · 16 posts · 0 votes11y
HI Brian, thanks for sharing such an informative post of your experience, with other BP members. I wasn't too sure about what you mean by other title 'gotchas'. I am unsure if you meant that the senior lien isn't always the lien the matter the most.
Secondly, what kind of reports should i buy if before i bid on a house. I just want to know monetary risk involved. I don't mind paying off second mortgages and liens, so long as the price is right. Would you recommend to first pay for a search that only shows outstanding balances and liens etc, against the property versus a report that shows who the previous owners were ?
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