Trying not to get impatient with auctions....

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Trying not to get impatient with auctions....

Tim Wittenborn
Flipper · Chicago, IL · Member since 2017 · 13 posts · 1 vote

Hey all,

Some history about us, my partner and I flipped a house that we bought as a HUD foreclosure. We profitted nearly 60k on this property and we are now sitting on roughly 110k in cash. Our goals were initially fix and flip, but after watching several bigger pockets podcasts, we both decided that the BRRR technique showed great promise. We are keeping our options open for whatever comes along.

We decided to start with auction properties, since here in the suburbs of Chicago it seems there is a huge shortage of ANY property selling for under market value, including REOs.  It took about 2 months to develop a system that works well:  Pulling auctions in our price range, comping out the ones that we think will work, driving to look at the properties, having a title company run title searches, etc.  Whittling 30 or so properties down to only a few.  We have been actively bidding on 1-3 properties a week for about 2 months now.

We have had a few close calls where i was only a thousand or a couple hundred dollars away from winning the property.  The properties we are interested in after due diligence always have a good amount of aggressive bidders.  All of this is good.  We know that we are doing the right things and bidding on the best properties.  My problem is that we are always outbid.  Sometimes it is a bull headed person that seems like they will bid up to ANY amount.  Sometimes it seems like it's a representative of a wholesaler who bids and wins several properties that day.  Sometimes it's an odd situation where 2 or 3 people take the property WAY outside of profitability range.  It's almost like the people outbidding us don't need to make a profit.  

I know I should not despair, but it's been nearly 5 months of paperwork since we sold our first house, and I'm getting antsy.  Any words of encouragement or advice is greatly appreciated.

Thanks BP!

Tim W

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Account Closed
Flipper · Pittsburgh, PA · Member since 2017 · 218 posts · 345 votes
9y

@Tim Wittenborn

At least in my area, unless you're completely in the game, you have no real chance of getting a really good deal at the auction unless you have some kind of edge. When I say "completely in the game," I mean that distressed property is your job and your life. I live in Pittsburgh, and Pennsylvania has a judicial foreclosure process. The auction is the nexus of all distressed property in my county. So my situation is the extreme, but much the same factors are in play everywhere.

You have three competitors to worry about at the auction: the stupid bidder, the wholesaler, and the investor-contractor. Of these three, the investor-contractor is the most dangerous. Thankfully, he's limited. He can't bid on EVERY property that comes along because his resources are limited. The reason he can always outbid you and everyone else is that his renovation costs are ALWAYS going to be lower than yours. He has multiple edges. He gets his materials far more cheaply. His crew makes peanuts off him compared to what your contractors will charge you. He has long-term relationships with his main specialized subs, and often reciprocal barter relationships. He knows the code enforcement people in the area he's bidding in. He can better evaluate the condition of the property. You know those really nice hot new splash fixtures most real estate investors have to spend lots of money on? Quite often, he gets them for free as one or another trial program to evaluate them for the manufacturer. And of course he installs them in his projects for peanuts.

Again and again, he can bid higher on a property than you can because he doesn't have the same expense structure. Stupid bidders who are willing to pay too much money for what they think is a good-looking property come, lose their shirts, and go, but the investor-contractor is a constant fixture at these auctions, an adversary who does not go away and just keeps showing up, ready to bid.

Even worse, the investor-contractor is a known quantity. When he starts bidding at a property, you'll notice that the regular wholesalers who frequent these auctions remain silent. There are all sorts of barter relationships going on in that room between veteran auction-goers. Why work against each other when you can work together? I do you a solid, you do me a solid. They know they simply can't beat out the investor-contractor and still make money on the deal because their numbers won't add up. Let the lion have his share once he makes his interest known. There's plenty left over.

Another poster has pointed out that flippers need to keep their crews running to make money. This is perfectly true. That's a good reason for an investor-contractor to spend a bit more money on a property than he otherwise would. But here's another scenario: maybe the property the investor-contractor is bidding on is right next to a property he's already working on. The two crews working on the houses can easily share members, materials, and tools. His renovation costs on the second property just tumbled another ten to fifteen percent as one project became two with multiple shared costs. That's an incredible edge.

So, let's say for some reason you take away the stupid bidders and the investor-contractors. You still have to get through the wholesalers. These are typically the most successful wholesalers in your area. They don't have quite the same money edge that the investor-contractor has, but they've spent many years studying their area and studying real estate, and they have established relationships with the investor-contractor, and they will pounce on every good-looking property they see, and they typically know large areas like the back of their hands. They do nothing all day but go look at properties off the auction list, run their own title searches, and line up investors.

So what's your edge? If you don't have one, you're not likely to beat the auction.

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  • Sara K.
    Investor · Winter Garden, FL · Member since 2017 · 86 posts · 74 votes
    9y

    What is your buying criteria? It may be unrealistic for your market.

    0Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    There are lots of reasons people bid higher. Sometimes they are homeowners. Reps of the bank or reps of the 2nd mortgage holder. Sometimes they have been able to get inside to see the condition and make more accurate rehab estimates. Often potential landlords will pay more than flippers and sometimes, flippers need to buy projects just to keep their crews working. Doesn't matter if they make much profit. If they have full time crews, they have to keep them working or they leave so a break even property that keeps your crew working and happy is well worth it.

    Also pro flippers who have their own crews have MUCH lower rehab costs than you do so you think they are not making profit but they are.  When I was buying in DuPage there was a group of Indian investors who had very low labor costs. Their goal was 5000 profit per house and they needed to do as much volume as possible. That is hard to compete against.

    2Reply
  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    Volume is always king.. Why not skip the auctions and give direct mail a try. You remove all the bidding wars and what not that come with a auction block.

    0Reply
  • David Brown
    Vacaville, CA · Member since 2017 · 3 posts · 3 votes
    9y

    hey think of it like this every home that makes it to the auction steps is a home you could have made a deal with the owner because it is the owners house til the day of the auction for tbe 100 grand you have you could get 10 homes by catching up the late payments taking title in your name and leaving the loan in their name it just taked communication with the bank and the person you are making a deal with. DO NOT DO LETTERS TALK TO OWNERS IN PERSON AND BE PERSISTANT AND FRIENDLY CHEVK ALL HOURS OF THE DAY AND NIGHT. you will beat any other invedtor with the same knowledge by having a better work ethic trust me i am doing great in the bay area getting hallf mil $ homes as low as $4500. No credit 12 homes so far all rented and free and clear

    1Reply
  • Tim Wittenborn
    OP
    Flipper · Chicago, IL · Member since 2017 · 13 posts · 1 vote
    9y

    Hey, thanks for the responses!

    I've been listening to podcasts and doing as much learning as possible.  I'm going to try and branch out with some other marketing techniques to add to my auctions.  Still learning a great deal every day I am on BP.

    With Direct mail, it's basically up to me to work magic with the people when they actually call?  I was able to find a template for a mailer, but no idea what would happen next.  If I do convince them to sell, do I go through my realtor at that point?  I'm sure there is a post somewhere with Direct Mail laid out.

    Also, I have a good friend who is my realtor and I have laid out exactly what I am looking for with him.  So that opens up even more possibilities.  My goal is to find a few investors to befriend to open up more possibilities on finding some properties.

    @David Brown  How do you get the property and they keep the loan?  I haven't heard anything about this before.  Properties for so cheap by catching up late payments?  Is there a thread explaining exactly how this works?

    Anyway, I'm off to read forums,

    Thanks again,

    Tim W

    0Reply
  • Account Closed
    Flipper · Pittsburgh, PA · Member since 2017 · 218 posts · 345 votes
    9y

    @Tim Wittenborn

    At least in my area, unless you're completely in the game, you have no real chance of getting a really good deal at the auction unless you have some kind of edge. When I say "completely in the game," I mean that distressed property is your job and your life. I live in Pittsburgh, and Pennsylvania has a judicial foreclosure process. The auction is the nexus of all distressed property in my county. So my situation is the extreme, but much the same factors are in play everywhere.

    You have three competitors to worry about at the auction: the stupid bidder, the wholesaler, and the investor-contractor. Of these three, the investor-contractor is the most dangerous. Thankfully, he's limited. He can't bid on EVERY property that comes along because his resources are limited. The reason he can always outbid you and everyone else is that his renovation costs are ALWAYS going to be lower than yours. He has multiple edges. He gets his materials far more cheaply. His crew makes peanuts off him compared to what your contractors will charge you. He has long-term relationships with his main specialized subs, and often reciprocal barter relationships. He knows the code enforcement people in the area he's bidding in. He can better evaluate the condition of the property. You know those really nice hot new splash fixtures most real estate investors have to spend lots of money on? Quite often, he gets them for free as one or another trial program to evaluate them for the manufacturer. And of course he installs them in his projects for peanuts.

    Again and again, he can bid higher on a property than you can because he doesn't have the same expense structure. Stupid bidders who are willing to pay too much money for what they think is a good-looking property come, lose their shirts, and go, but the investor-contractor is a constant fixture at these auctions, an adversary who does not go away and just keeps showing up, ready to bid.

    Even worse, the investor-contractor is a known quantity. When he starts bidding at a property, you'll notice that the regular wholesalers who frequent these auctions remain silent. There are all sorts of barter relationships going on in that room between veteran auction-goers. Why work against each other when you can work together? I do you a solid, you do me a solid. They know they simply can't beat out the investor-contractor and still make money on the deal because their numbers won't add up. Let the lion have his share once he makes his interest known. There's plenty left over.

    Another poster has pointed out that flippers need to keep their crews running to make money. This is perfectly true. That's a good reason for an investor-contractor to spend a bit more money on a property than he otherwise would. But here's another scenario: maybe the property the investor-contractor is bidding on is right next to a property he's already working on. The two crews working on the houses can easily share members, materials, and tools. His renovation costs on the second property just tumbled another ten to fifteen percent as one project became two with multiple shared costs. That's an incredible edge.

    So, let's say for some reason you take away the stupid bidders and the investor-contractors. You still have to get through the wholesalers. These are typically the most successful wholesalers in your area. They don't have quite the same money edge that the investor-contractor has, but they've spent many years studying their area and studying real estate, and they have established relationships with the investor-contractor, and they will pounce on every good-looking property they see, and they typically know large areas like the back of their hands. They do nothing all day but go look at properties off the auction list, run their own title searches, and line up investors.

    So what's your edge? If you don't have one, you're not likely to beat the auction.

    6Reply
  • David Brown
    Vacaville, CA · Member since 2017 · 3 posts · 3 votes
    9y

    Well it's all 

    0Reply
  • David Brown
    Vacaville, CA · Member since 2017 · 3 posts · 3 votes
    9y

    there'll be realtor's that will be title companies that tell you they've been doing this 30 years and it's impossible they never seen it done it's not true unfortunately these people are doing home sellers and buyers a big disservice they miss countless deals because they fell to be creative there are two types of Deeds for a property one is a deed which is a grant deed quitclaim deed that prove then give title of the home to a particular person then there's a deed of trust a deed of trust is when the bank or some type of lender puts a lien on the property for the amount owed to purchase the property so if you purchase the home through financing you will have both of these titles the title given you power to sell which is the grant deed and then the trust deed or deed of trust if you go down to your Recorders Office you can look up your home and you will see if you have financing that you have a deed of trust and you have ownership title to the home which is the grant deed on the deed of trust you can look up how much you owe how much your monthly payments are and when the loan first started anyways you have the right to transfer title at any time on the property because you are the owner if you read the clauses in the deed of trust it will tell you the stipulations if you change title sometime the lender will require full payment on the loan amount you can avoid this problem by simply contacting the bank with the previous owner who you intend to buy the property from have him go to the bank with you and facts a copy of yours and his ID giving you permission to have access to the account to make payments and know what the balance is you can speak to the bank and say Hey listen I'm going to help out my friend by taking over this property and make timely payments sometimes the banks would just rather get their money then have to pay lawyers and foreclosure costs just to give you a hard time if the bank would want full payment of the loan they give you time to qualify sometimes you don't need to have good credit is basically just documenting all of your payments that you made on time payments you've made on time they give you 60 days to six months to secure financing before they start demanding full payment very rarely have I had this problem but I have had this problem and when I did I just had the previous owner did me the property at the title company and I didn't record the deed which can be dangerous and listed the property for sale when I found a buyer I had the title company record both the Deeds at the same time and I made a big profit I hope you really could appreciate this information you have any further questions 

    2Reply
  • Tim Wittenborn
    OP
    Flipper · Chicago, IL · Member since 2017 · 13 posts · 1 vote
    9y

    @Account Closed

    Thanks for the response!  You hit the nail on the head there.  Your post explains exactly what I've been running into at the auction.

    I think my edge is more on the investor contractor side of things and I potentially need to re-evaluate my buying power.  I have several contractors in the family and a good deal of friends that offer materials and services at cost.  Being that I'd like to do the work on at least the next 1 or 2 properties, I should be able to bid a bit higher.  First auction has me being very cautious though, I wan't to make sure it's a solid deal.

    I have been looking in to direct mail and some other ideas to increase the likelihood of finding a property.  My real estate agent also has my criteria and is on the lookout.  Researching and bidding at auctions has taught me a great deal, but it's time to branch out.  

    Not sure where I'm gonna find it, but it will be soon and i'm excited!

    0Reply
  • Account Closed
    Flipper · Pittsburgh, PA · Member since 2017 · 218 posts · 345 votes
    9y

    @Tim Wittenborn

    Glad it made sense. I personally try to get to the Allegheny County sheriff sale here in Pittsburgh every month. I've been doing it for years. The time loss and opportunity costs have been extraordinary.  But I'll be damned if it wasn't the best no-bull education you could get on distressed property investing in my area.

    Tim, even if the first deal turns out not to be so good, as long as it doesn't break you, you'll end up ahead in the long run. There are too many swirling tornadoes of vague fear and failure that go on in this business and too many smug self-congratulatory types who never get tired of patting themselves on the back or putting you down, and preferably (for them) both.

    I know the jargon at the auction can be overwhelming. I know a lot of these guys look like worldbeaters. But if you go in there with the certainty that you can (painfully) afford to lose every cent of the money you bid for a property and a willingness to take a punch in the kidney and get back up again,  you're more ready to take your shot at this business than half the dudes in the room.

    Our big thing outside the auction is pocket listings. Get your cash reserves in order and start talking to as many 60-year-old-plus real estate agents as you can, men and women who have been plugging away at it for thirty, forty years. Old real estate agents who have huge personal good-old-boy and girl networks to draw on, membership in the local social organizations, maybe did a stint on a local school board or a municipal council, that kind of thing.

    Especially when it comes to buying local rental properties, you can't do better than old landlords who only own one or two urban residential duplexes that they inherited from Daddy way back when, places that have provided them just an ever-dwindling bit of rental income all their lives in exchange for a bit of hands-on maintenance. And now that the old lumbago is acting up sumthin' fierce, it's time to get that condo in Florida that they've been dreaming about since their kids finished high school. And for that they need some cash for a down payment.

    The good-old-boy real estate agents know every single one of those landlords. They've been sending them Christmas cards for the last fifteen years. When it comes time, the landlords always call the agents they met way back when through the Masons, the Elks, the Rotary Club, their church, whatever. The agent sews up the pocket listing and off they go to find an all-cash deal with a young whippersnapper with fire-in-the-belly who'll really do right by the place. The agent has huge pull with the seller, and the agent is looking first and foremost to cash out as much of their carefully-built-up networks as possible after a lifetime of eating stale cookies at church socials and scrimping on groceries to pay for stamps to send out their newsletters.

    You use the magic terms "all cash buy" with the agents, meet the sellers, listen to their maudlin stories of how awesome the United States was when Mutual Assured Destruction was considered a sane foreign policy, and you get deals like you wouldn't believe.

    Good luck!

    0Reply
  • Tim Wittenborn
    OP
    Flipper · Chicago, IL · Member since 2017 · 13 posts · 1 vote
    9y
    Thanks again for all the input guys! I knew that I shouldn't be getting impatient. This morning, I won my first auction property! it was intense, 18 bidders at start, and I stayed 2k under my max bid (which I inflated a bit due to doing my own rehab work). I'm tingling!!! Cheer's to number one!!!
    1Reply
  • Account Closed
    Flipper · Pittsburgh, PA · Member since 2017 · 218 posts · 345 votes
    8y

    @Tim Wittenborn

    It's like the world stepped aside for a moment, isn't it? Good on you, Tim!

    0Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    8y
    Tim Wittenborn It sounds like you have a bunch of people that are doing what you do. Targeting properties in the same price range. Doing similar diligence. And, not shockingly, coming up with prices that are (to use your terms) within hundreds or one thousand dollars of your bid. All that tells me (from afar) is that you have competitors that are willing to take $500-$1,000 less in profit. That’s not exactly weird or crazy and that’s also assuming their cost structures are the same as yours (which may not be true). Bottom line, if you feel like a segment has too much competition then move to a different segment. Or take less gross profit 🤷🏻‍♂️
    0Reply
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