Starting bid price in a Trustee Sale auction

19 Replies

Who establish the starting bid price  (minimum bid)  in a Trustee Sale auction ? Is this price relate to the mortgage balance ? 

I see a case where the mortgage balance is 350K and the starting bid price is 200K. What happen if someone win the bid at 201K? Will the bank accept to loose almost 150K ?

Thanks

the bank will always bid up the price at least to over two-thirds of the amount they are owed.  May even up to the amount owed. They have no reason to let someone buy the house too cheap. Then they will market the property through realtors.

Arlan: then why the bank set the  price closer to the  mortgage balance, in this case around may be 330, 340K, so they don't have to worry that some third party will  buy the house at cheaper price 

The banks routinely set a price they would let the property go for at the auction, which has no relation to the amount owed. They set it based on what they believe FMV is, and if they take it back, holding costs, commissions, etc. The bank realizes when they are owed much more than the property is worth, that they are going to lose money, it' just a matter of how much. However, sometimes they haven't established a value, and will just instruct the trustee to bid the amount owed, and they'll figure it out later after they get it back.

Wayne: what you said is not true in my case, the FMV of the house is very close to the mortgage balance (around 350K), but the starting price is 194K and my winning bid is 240K.. Do you see anything wrong here ?

In my professional opinion - the bid price is set low in order to attract more buyers but not what will actually be accepted.  My most recent purchase (11-4-14) at Trustee Auction was on a property with a starting bid at $30K but bank was willing to go up to $46,800.  I bid $46,801 and won property.  It had an original mortgage balance of just over $90K. 

Originally posted by @Lang Le :

Wayne: what you said is not true in my case, the FMV of the house is very close to the mortgage balance (around 350K), but the starting price is 194K and my winning bid is 240K.. Do you see anything wrong here ?

If the property is really worth $350K, then the property will not be sold at trustee's sale for $240K.  Other bidders will likely bid higher, and if not the lender will bid to take it back. A dropped minimum bid usually gives some indication of lender's idea of value. Are you sure the $350K loan is in first position?   

There is no standard, "rule of thumb" or ratio that dictates starting bids at trustees sales. Every lender sets their own opening bid, and it ranges from a full credit bid all the way down to a small percentage of the unpaid balance. They also decide whether to bid against third parties to some amount up to the unpaid balance. Sometimes they do, sometimes they don't. I've bought properties for as low as around 20% of the unpaid balance, but that doesn't mean 20% of market value.

Lenders are like any other seller. They have to decide whether they want to take the property back or let go of it, and they price accordingly. It's not always as crazy as it sounds...think about a loan that was sold to another lender at a fraction of the note amount, even if the new lender sells it for a substantial discount at the trustees sale, they could still make a profit on their loan. In other cases, lenders choose whether to lose money at the trustees sale, or lose money when selling it REO. If the loan is upside down, they will take the loss one way or the other.

Originally posted by @Rocky V. :

In my professional opinion - the bid price is set low in order to attract more buyers but not what will actually be accepted.  My most recent purchase (11-4-14) at Trustee Auction was on a property with a starting bid at $30K but bank was willing to go up to $46,800.  I bid $46,801 and won property.  It had an original mortgage balance of just over $90K. 

In your example the bid was dropped because the property was upside down.  We see that everyday.  The lender has already agreed to a hit when they drop the minimum bid 50% or more below loan value....they're just hoping for bidders. The OP says the property value is the same as the mortgage balance.  So not sure why they dropped to min. bid so low.  I suspect the value is wrong or the loan isn't in first position.

K. Marie Poe said:

"If the property is really worth $350K, then the property will not be sold at trustee's sale for $240K. Other bidders will likely bid higher, and if not the lender will bid to take it back. A dropped minimum bid usually gives some indication of lender's idea of value. Are you sure the $350K loan is in first position? "

I have the title search and  its Deed of Trust reveals that the property  has a note around 360K as of Mar 2012,  and then the owner declared  BK  around Sept 2013, so  my guess the balance must be somewhere 350K

@Lang Le  Read Brian's post again.

The banks set an opening bid.. Sometimes its a step bid and if anyone bids then the crier jumps the bid up to a much higher number.. But rarely do they bid in sequence with the public.. There is also mortgage insurance involved in some of these that will dictate opening bids.. and sometime the banks just F up and the bid is very low..

The risk the banks have in certain markets if they start opening bids to low is the good ole boys colluding to not bid against each other this is illegal but very prevalent in certain markets.

Just look at trustee sales 3 and 4 years ago in Vegas PHX and Atlanta opening bids were routinely less than 50% of unpaid balance.

Then you have Mississippi were for whatever reason they banks will almost always bid full credit ... partly because like Texas they may want to establish their deficiency judgment and or like I said Mortgage insurance could come into play..

At trustee sales ours is not to reason why ours is to bid and buy property if we think its a good deal.  Then in GA you wait for months getting your trustee's deed that's whats frustrating about that state.

Originally posted by @Brian Burke :

There is no standard, "rule of thumb" or ratio that dictates starting bids at trustees sales. Every lender sets their own opening bid, and it ranges from a full credit bid all the way down to a small percentage of the unpaid balance. They also decide whether to bid against third parties to some amount up to the unpaid balance. Sometimes they do, sometimes they don't. I've bought properties for as low as around 20% of the unpaid balance, but that doesn't mean 20% of market value.

Lenders are like any other seller. They have to decide whether they want to take the property back or let go of it, and they price accordingly. It's not always as crazy as it sounds...think about a loan that was sold to another lender at a fraction of the note amount, even if the new lender sells it for a substantial discount at the trustees sale, they could still make a profit on their loan. In other cases, lenders choose whether to lose money at the trustees sale, or lose money when selling it REO. If the loan is upside down, they will take the loss one way or the other.

So true:  Note holders are just like any other seller. The property might be upside down and the note holder might be taking a loss. They might be motivated to not get the property back.  They might have bought the note cheap. They might be making a killing by selling to a 3rd party bidder at 50% of loan balance.    

I was once a motivated note holder.  I bought the note at a deep, deep discount. My foreclosure was scheduled 5 days before the county tax sale.  Back then I didn't have the $20K in cash needed to save it from tax sale. So I really wanted it to sell at trustee's sale. I dropped the minimum bid to 30% of loan balance and I told the tax sale and foreclosure investors who called that I would accept a short sale if they could get the borrowers to work with them.  In the end, it sold at sale with multiple bidders and I did fine on that one.

No way you can really know the details of someone's note/loan deal, so best just to bid what makes sense for your purposes 

Originally posted by @Lang Le :

K. Marie Poe said:

"If the property is really worth $350K, then the property will not be sold at trustee's sale for $240K. Other bidders will likely bid higher, and if not the lender will bid to take it back. A dropped minimum bid usually gives some indication of lender's idea of value. Are you sure the $350K loan is in first position? "

I have the title search and  its Deed of Trust reveals that the property  has a note around 360K as of Mar 2012,  and then the owner declared  BK  around Sept 2013, so  my guess the balance must be somewhere 350K

 What else does the title report say?  Are their other liens that will survive the foreclosure?  Any tax liens or IRS liens?

Nobody yet mentioned that the note (as NPN) may have been sold at a discount by the original lender, and the new lender can set the starting bid low and STILL get paid back in full what they have into the note and even have some profits to boot.

In my area, there are some towns where buyers aren't too interested in going; for foreclosure properties in those towns, the starting bids are almost always a fraction of the debt owed - and usually nobody bids anyway. 

Mortgage insurance is another factor that affects how the lender bids. 

What I have learned is to not try to logically determine what the starting bid will be, because there really isn't always some logical formula you can use to predict starting bids with accuracy. 

Kristine Marie Poe 

  similar to your situation.. I had a 8 plex that I loaned on up in Tacoma.. its was a great property when I made the loan.. the borrower got into drugs let a bunch of crack people into the property  defaulted.. its was a nightmare..

But it was 8 units in Tacoma... I was owed I think 350ish ARV close to 600k... But did I want to deal with that property NO way I started opening at 270k we got bid to 322k and I was happy to take a small loss.. with my Delta on the interest the guy did pay and my points up front I broke even on the deal over 2 years... But I would much rather make a profit but as a lender it does not always work out that way.

@Lang Le  

  as a follow up there is also the drop bid.. that is were the bank will un announced to anyone just drop the opening bid by a large amount.

So you call the trustee day before the sale and they tell you opening bid 200k well you think heck that's no deal I am not going to get a check ready for that one.

Well you go to the sale and the next thing you know the crier opens the bid for 125k  every one is looking at each other no one has a check and it reverts to lender.

Well after seeing that happen more than a few times.. I always had an extra 200 to 500k in cashiers checks with me just for those occasions and about 2 to 4 times a year I would prick up a screamer with no bidding competition because I was the only one with a check.

Originally posted by @Steve Babiak :

In my area, there are some towns where buyers aren't too interested in going; for foreclosure properties in those towns, the starting bids are almost always a fraction of the debt owed - and usually nobody bids anyway. 

I'm always curious about these types of areas, where even with low prices nobody bids at sale.  Makes me wonder who was willing to loan there in the first place.  Unless the foreclosures are all seller carry backs. 

Kristine Marie Poe - neighborhoods can go downhill fast, especially in lower income areas. 

Banks are not allowed to "redline" so they have to lend when there is a willing buyer. There were willing buyers prior to the market bubble; not so many willing to buy in those areas any longer, since the neighborhoods are declining still in both "quality of life" and value. 

Originally posted by @Jay Hinrichs :

@Lang Le  

  as a follow up there is also the drop bid.. that is were the bank will un announced to anyone just drop the opening bid by a large amount.

Huh, I had never heard of a drop bid before.  I've only heard of step bids (where the bank raises the price substantially at the auction).  I'll keep an eye out for this!

I don't know if this happens in other states, but in Washington state there are some auction bidding service companies like Vestus, Caliber, etc.  When I've gone to the auctions, I rarely see people bidding on properties themselves; they usually bid through these companies.  Since they have an advantage over us with their manpower and resources, will individual investors ever be able to do well on these auctions on their own?

@Nghi Le  Vestus  Fairplay Caliber  those are company's that are fully integrated with RE brokerage hard money lending and research and due diligence on each foreclosure.

Drop bids certainly do happen not that frequently though.. and were very prevalent in  the AZ market.

The organized bidding companies are stiff competition no doubt.

Very tough to make money buying foreclosures in the major metro areas your up against the big money players. 

One thing you may do though is try to follow sales that are not northwest trustee's or other bid trustee services concentrate on the ones that are done by small attorney firms. sometimes those fly under the radar.

But I got out of this back in 07 08 and rolled into HML made better returns with the capital than I did in the foreclosure bizz in PDX.. way to much competition and that was right went vestus fairplay and the like came on the scene.

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