How much over asking should you bid to win foreclosure?

Question

I have been unsuccessfully bidding on multi unit foreclosures in Chicago and was wondering if there was a rule of thumb for over bidding to successfully land a deal?

These are bank owned properties that are cash only, in need of major rehab, most times you are asked to waive inspection, and sometimes have squatters.

I most recently submitted a purchase agreement for the list price and was told there was a bidding war and lender needed highest and best offer. I increased offer 4k as numbers still worked and haven't heard back from bank.

Does anyone have any bidding suggestions or experiences that may help?

Joe Splitrock · Answer

@Ashley Pimsner if you are bidding what you need to make the numbers work, then there is nothing you can do. I have bid on a couple foreclosures and lost them by a fair amount. One of them got flipped and has been siting on the market three months. The price has been dropped three times and it is still high. My point is just because someone outbid you, doesn't mean they got a good deal.

Michael Noto · Answer

@Ashley Pimsner There is no rule of thumb when bidding on foreclosures, but the other details of the contract besides the purchase price can make or break an offer being accepted.  In a competitive market like the one we have here in CT, any foreclosure that either myself of my clients have purchased has:

• not had an inspection contingency
• has had an EMD of at least 10% of the purchase price
• has been a cash or hard money offer (if you go the hard money route it is more important that both yourself and the HML have a solid track record of closing deals)
• been able to close within  30 days

Russell Brazil · Answer

There is no rule of thumb.  The list price could be close to its actual value, way under, or way over.

Id say figure out what your top number is, then go ahead and add $10-$20k on top of your best number.  If you are going to be holding this property a long time, paying an extra $10-$20k isnt going to be a big deal over the long run and wont affect your cash flow all that much. Im assuming we are dealing with relatively high priced properties too since this is Chicago...obviously $20k extra on a $100k property would be a significant amount.

Last year I over paid for one of my rentals by about $10-$15k. I paid $410 for a property worth in the $395-$400k range....but even a year later that slight overpay disappeared since Im looking at about $435kish on the property now.

Eric M. · Answer

You have not found a pattern because there is none, therefore no rule of thumb. These banks don't know you are going to "execute" because you have never done a deal with them before.  They often go back to the same buyers who they know. Plenty of buyers bail on all cash offers.

Some list properties low to entice a bidding war, some list high to see if some newbie bites.  Some do something else.

There is no rule.

You have chosen to enter a very hot competitive market. If someone told you it was easy pickings, they misled you.

You may need to look at your methodology.  Are you estimating repairs properly? Do you have a high cost of money? More likely you are requiring too much profit per deal because you have read some guru's stuff or are using some set % or listened to fish tales from other investors.

We all want huge, easy returns but they aren't common.  Too much competition drives down profit margins.  There are many investors out in the chicago burbs willing to flip houses for $5K profit each and they need to do a bunch to make money. They suck up the volume at auctions and REO's. They have low cost of money and lower cost of labor than you so they can beat your bids most every time. They will even do deals for no profit to keep their crews busy.

Sounds like you are rather new. Be willing to do your first couple for little profit to get some experience. Then you can better find ways to scratch out some profits.

Ashley Pimsner · Answer

@Michael Noto, thanks for confirming your parameters...I have waived inspection, provided proof of funds, EMD a little higher @20%, and set closing within 30 days, so I guess that just leaves price.

It is competitive and I am being aggressive on price, but will not over pay just to get a deal.

Maybe I need to keep on making offers and stay disciplined until something hits.

Thanks again.

Ashley Pimsner · Answer

@David Dachtera I have been monitoring past unsuccessful bids and have yet to find a pattern.

@Kranti K these are all cash deals so does it matter your experience as long as you take the property off the banks books? You execute by paying cash as far as bank concerned and after that bank has no skin in the game.

Kranti K. · Answer

not only the best offer its important but also experience in being able to execute the deal is very imp(i.e., past experience), if they see you as a newbie who is going to hesitate to execute then they most likely don't want to deal with you.

David Dachtera · Answer

@Ashley Pimsner,

Maybe try looking up the properties where you lost and see how the final sale price compares with your bid. That might give you some idea how to modify your strategy.

How much over asking should you bid to win foreclosure?

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