Orange County Auctions Selling at less than 15% Discount?

7 Replies

From the auctions in Orange County from July 30, 2015 to August 18, it seems to be the case that auction winning bids are less than 15% discounted from market prices.

https://docs.google.com/spreadsheets/d/1Gta1Q8JMFC...

That means for a $500,000 all cash purchase, 10%, or $50,000 going to renovations and whatever craziness occurs (evictions, etc), and then maybe 5% for real estate commissions.

You're already in the hole.

Oh, and hope that the market doesn't crash while you try to sell!

So the only way to make money seems to be that you sell your own house as an agent (save about 2.5% on commissions), and that you do the renovation work yourself (maybe save half to 75% of the contracting cost). And that the market doesn't have any sort of dip whatsoever.

Does my rough analysis seem out of step with reality?

Colorado Springs is the same. I run really tight numbers accounting for everything down to the light switch covers, then add a sensible percentage for contingencies. I know I'm going to make thin margins but if I can average 12% 6month ROI I'm ok with it. It's just tough to find deals.

@Jefferson Kim so you use some terms loosely which may impact your conclusion. You stated that the auction was a 15% discount over the "market" So I take that to mean that a comparable beater house in the MLS would cost you 15% more than the same beater house sold at auction. My take is that the auction gives you 15% more margin to work with. That margin is there because the auction does not afford you the same opportunity to inspect and walk away if there are some unforeseen deal breakers. With the auction, you own those issues. Most auction homes get rehabbed and go from worst to first in terms of desirability. It's really hard, especially in a hot market to know what kind of a premium buyers are going to pay (and appraisers allow for) when a house has been completely redone. Also some renos add square footage and amenities.

Originally posted by @Marcello D.:

Colorado Springs is the same. I run really tight numbers accounting for everything down to the light switch covers, then add a sensible percentage for contingencies. I know I'm going to make thin margins but if I can average 12% 6month ROI I'm ok with it. It's just tough to find deals.

This has to be a really weird downturn that we're headed toward. Where housing inventory will be extremely low at least in SoCal & Colorado Springs, and home prices don't decrease much.

At least in California, Bruce Norris talks about the difficulties for new construction, causing inventories to remain low while population increases.

This is going to be a different kind of downturn compared to the last cycle where I imagine the Real Estate side will be relatively unscathed. We have a lot of Chinese investors paying 50% down (because banks don't trust the credit) or even all cash, so even if there's an economic downturn, its not like those inventories are going to be auctioned off.

And then the local people who purchased had much stricter underwriting guidelines than the last cycle, so unless there's massive more unemployment (where SoCal already has extremely HIGH unemployment), those homes won't be distressed either. But the job recovery after the latest cycle has been with relatively lame without the high paying jobs that typically are associated with home purchasing. And the affordability index didn't get much better, so I'd imagine that the people who purchased homes already have jobs that are less at risk in a recession.

Maybe something to do with raising interest rates would slow down new purchasing, and perhaps that could trigger some kind of chain reaction of badness. But I imagine the fed wouldn't do that in the economic trend that seems to be playing out.

It'll be interesting to see how this all plays out.

Originally posted by @Bill S. :

@Jefferson Kim so you use some terms loosely which may impact your conclusion. You stated that the auction was a 15% discount over the "market" So I take that to mean that a comparable beater house in the MLS would cost you 15% more than the same beater house sold at auction. My take is that the auction gives you 15% more margin to work with. That margin is there because the auction does not afford you the same opportunity to inspect and walk away if there are some unforeseen deal breakers. With the auction, you own those issues. Most auction homes get rehabbed and go from worst to first in terms of desirability. It's really hard, especially in a hot market to know what kind of a premium buyers are going to pay (and appraisers allow for) when a house has been completely redone. Also some renos add square footage and amenities.

Yeah, the "market rate" is just what I grabbed from PropertyRadar for a sloppy calculation.

And correct, I'm not considering "value added" projects. For a newbie like me exploring auctions, I was more looking toward bringing the auctioned properties up to "par" with all the other homes that have sold.

There are some examples in my spreadsheet of homes purchased in February / March, sold in summer, with some pretty well done renovations. It's interesting to see which properties are still "pending" or listed that were purchased 5 - 6 months ago.

@Jefferson Kim I'll start by saying this is a bit above my head. That doesn't keep me from having an opinion. IMO real estate will slow due to rising interest rates. Fewer people can afford to buy a house at the same price since the interest rate drives the payment up. If interest rates spike then we could see a decrease in prices since without wage growth there is only X dollars a month to make the payments. Fewer and fewer will be able to afford the payment X so the price might drop so that the payment can be made. In my market we are quite a ways away from that scenario with about 20 days of inventory available. Sure if we have a catastrophic event then things could turn on a dime but without some huge catalyst things usually take a bit of time to turn.

@Jefferson Kim  It's the basics, supply and demand. When there's a high demand for housing, few homes are going to end up at auction, or sitting on the market. Fewer houses means more demand and higher prices. 

An area that has a broad based economy like Orange County, and other similar areas will always have demand, though sometimes much tighter than others. The regulations in California have slowed down development in some areas. However; BIG developers always have projects in the pipleline, and getting ready to bring to market, which helps alleviate some the pressure on low supply. 

In times where there is tight supply in areas, new construction makes sense. 

When we originally came to southern California we thought the market would be n doing fix/flips. We soon realized that people were bidding foreclosed properties up over market values, and thought spec building might make sense. However; the challenge is finding vacant land in "marketable" areas, that is priced at a point where it makes sense to develop. It's tough! 

Start investing out of state. Out here in NC we have cash flowing deals that pop-up on a daily basis. For 500k you could buy 8+ cash flowing properties.

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