How is upset price set for auction???

6 Replies

I have been going to foreclosure auctions for some time now - even thought I would still consider myself a rookie, but how does the bank come up with their upset price?  I got to auctions in Queens, Brooklyn, Bronx - New York not sure if it works differently or the same in other parts of the country.  But for example on the list of sales the lien will be $525k, when the bank goes up to auction the house they will say 'Now we will be auctioning XYZ property banks upset price is $315k Bank bids $500"  Then some other times there will be a property and it will say on the list, lien is $450k for example, and when the bank goes to auction property they will say - upset price is $600k 

When you call the attorney representing the bank before the auction to see if the property is on or off (still going to be auctioned or not) and if you ask them "can you tell me what the upset price is?" They say "we dont give out that information" - why not?

Would appreciate some feedback.

I gone to real estate auctions here in New York City, and MA back during the last RE crash in the mid 90's. At it's height, I gone to on site auctions, court house step auctions, as well as public auctions. During that time, there were so many auctions that I have to limit myself to no more than one or two a week.

I wrote an answer recently on another thread that goes more into this:  REO properties

I stopped going to court house step auctions where bank always show up and bid on the their REO property. I did that for a while and find it's a waste of time.

As to the upset price, one of the problems is the bank itself has no idea of the value of the real value of the property. For control purposes, they rather not give out info to prevent collusions between bank officers and potential bidders and buyers. So, for instance, someone at the bank establishes the upset price, and say through hook or crook you find out who this guy is. So you call him and arrange to meet him at a coffee shop with an envelope of cash. He then arrange things so you'll be the winning bidder.

I've gone to auctions on site where they take bids. At several I was the winning bidder, at one I was the only bidder showing up. Then a week later, I would get a letter in the mail saying "sorry, the reserve price set is X and your bid was not accepted".

To do this, it's a game of numbers. You try one, no good, you go on to the next one, and by doing so, you'll eventually luck out. The best story I heard was at a condo complex where I bought two condos at auctions for around $40K where it used to go for $110K, thought I did great. Then I heard about an auction at this condo complex, held on site, where it was sold to the highest bidder for $8K. I asked how did it happened. The story was it was a absolute auction, held on site, and for whatever reason poorly advertised. So the condo owner, the bank and the agents were the only ones that knew and showed up. On the auction day, the foreclosed owner came by with his twin brother to observe. When no one showed up, they knew it was an absolute auction, so twin brother bid $8K and paid for it on his credit card. So how's that for being at the right place at the right time. Then on second thought, maybe there's some collusion?

@Frank Chin

Hi Frank, thats a pretty crazy story, yes I see what your saying about why not giving out the upset price, but I see your from Queens too, so you know they do the foreclosure auction every Friday at the court house - all the foreclosure properties are auctioned there every week.  And I get what your saying about the bank not knowing what its worth, but how in the world do they come up with that upset price????

They don't have a secret handbook somewhere, so my experience is based on what I heard. I had a chance to sit with an officer would worked in it for his bank. This was at a public auction where I was the winning bidder, and the deal was the bank will provide a 90% mortgage if you bring tax returns, pay stubs. I bought these items, they reviewed them, ran my credit check, and awaiting word of my mortgage approval.

While we were waiting, I was told the property which I bid on, the bank had as REO for three years. It was newly built in 1987, the developer got a mortgage of $300K, based on appraisals of $350K. The developer wanted $399K, and figured with the crazy market going up $50K to $100K a year, he'll get that in a few month, but 1986 was the peak, it starting going down in 1987 after going up for over a dozen years.

The developer thought he'll rent it while he waits, but with negative cash flow stopped paying by 1990, when the market crash was into it's 3rd year. The bank took over.

How did the bank look at it? It's got a $300K mortgage, and they want something close to it. In 1993, I looked at similar properties in the area, and they go for $290K to $325K. Unfortunately, for most investors I talked to, once it's tagged an REO, you don't use comps anymore. If not, then what, no one can say. As far as the bank was concerned, they see it as a $300K investment.

At this public auction, they had over 100 properties up for bid that day, and the auction house announced the first 20 will go absolute. As the auction house now set the rules, the bank has no say in it anymore. I actually was going to bid on another property, a few bidders had their eye on it, so it went beyond what I wanted to pay. The property I won was the 6th one up, towards the end, it was me and one other bidder, whatever he bid, I bid $500 more. My winning bid was $208K after the other guy gave up. My target was $225K.

The bank officer of the REO said the bank would never take a $208 offer on a property for something they had a $300K mortgage on it. If you think about it, why would they if the comps run around $300K.

Interesting enough, a broker went with his client and his client was one of the other bidders. He told his client, for an REO, don't bid more than 50%, or in this case $150K particularly if you're a cash buyer. The builder completed 4 houses, and got a $300K mortgage on each one. Another bank held the mortgage on the one two houses down. Two months after the auction I attended, the house two doors down was sold to this broker's client for $150K cash. This was because they use the sale of my house as a reference point. BTW, my next door neighbor got his, also an REO at the time a year before me for $235K, but he had to pay back taxes which I didn't. He told me the back taxes ran him another $20K. He got this by calling around REO banks.

Just to complete the story, the cash buyer that paid $150K sold it 6 months later for $230K. Then a few months after that, it was sold to someone who bought it at $310K, the market price. I know that as this buyer, who later moved in, rang my doorbell late at night to ask if he offered the right price, and I told him he did OK. Don't feel sorry for this guy though, he sold it for $870K in 2006, when the market surged again. I still have mine, in the property is now worth $1.3 million according to Zillow.

What criteria do you look at when you're at auction if you were looking to buy something, hold it for a couple months then sell it again like that brokers client did?

Originally posted by @Frank Chin :

They don't have a secret handbook somewhere, so my experience is based on what I heard. I had a chance to sit with an officer would worked in it for his bank. This was at a public auction where I was the winning bidder, and the deal was the bank will provide a 90% mortgage if you bring tax returns, pay stubs. I bought these items, they reviewed them, ran my credit check, and awaiting word of my mortgage approval.

While we were waiting, I was told the property which I bid on, the bank had as REO for three years. It was newly built in 1987, the developer got a mortgage of $300K, based on appraisals of $350K. The developer wanted $399K, and figured with the crazy market going up $50K to $100K a year, he'll get that in a few month, but 1986 was the peak, it starting going down in 1987 after going up for over a dozen years.

The developer thought he'll rent it while he waits, but with negative cash flow stopped paying by 1990, when the market crash was into it's 3rd year. The bank took over.

How did the bank look at it? It's got a $300K mortgage, and they want something close to it. In 1993, I looked at similar properties in the area, and they go for $290K to $325K. Unfortunately, for most investors I talked to, once it's tagged an REO, you don't use comps anymore. If not, then what, no one can say. As far as the bank was concerned, they see it as a $300K investment.

At this public auction, they had over 100 properties up for bid that day, and the auction house announced the first 20 will go absolute. As the auction house now set the rules, the bank has no say in it anymore. I actually was going to bid on another property, a few bidders had their eye on it, so it went beyond what I wanted to pay. The property I won was the 6th one up, towards the end, it was me and one other bidder, whatever he bid, I bid $500 more. My winning bid was $208K after the other guy gave up. My target was $225K.

The bank officer of the REO said the bank would never take a $208 offer on a property for something they had a $300K mortgage on it. If you think about it, why would they if the comps run around $300K.

Interesting enough, a broker went with his client and his client was one of the other bidders. He told his client, for an REO, don't bid more than 50%, or in this case $150K particularly if you're a cash buyer. The builder completed 4 houses, and got a $300K mortgage on each one. Another bank held the mortgage on the one two houses down. Two months after the auction I attended, the house two doors down was sold to this broker's client for $150K cash. This was because they use the sale of my house as a reference point. BTW, my next door neighbor got his, also an REO at the time a year before me for $235K, but he had to pay back taxes which I didn't. He told me the back taxes ran him another $20K. He got this by calling around REO banks.

Just to complete the story, the cash buyer that paid $150K sold it 6 months later for $230K. Then a few months after that, it was sold to someone who bought it at $310K, the market price. I know that as this buyer, who later moved in, rang my doorbell late at night to ask if he offered the right price, and I told him he did OK. Don't feel sorry for this guy though, he sold it for $870K in 2006, when the market surged again. I still have mine, in the property is now worth $1.3 million according to Zillow.

 

Originally posted by @Allan Kyariga :
What criteria do you look at when you're at auction if you were looking to buy something, hold it for a couple months then sell it again like that brokers client did?

 I'm mostly a buy and hold investor, and I've bought at auctions at market bottoms, where prices have already dropped 25% or more. But I concentrated on buying newer properties that's new or only a few years old sold at auction. I managed to snag  few in the early 90's, but the market bottom came and went too fast in 2006 through 2008 here. I also snagged a duplex.

With auctions, you never know what's going to happen. I gone to many on site auctions to observe and I turned out to be only one showing up. So when the auctioneer starts, looks at me, and ask "are you going to bid"?, I usually give him a ridiculously low bid, and I would get a reply in the mail a few week later to say "the bid was rejected". But there's one on site auction at a condo complex that I bought some condos at auction, a condo worth $125K was sold for $8K, possibly a snafu.

Bids are state dependent. Some have one bid, some have tiered bidding. At the end of the day, the bank stops bidding once the bids reach their total debt. The bidding structure gets a little tricky if it is not your run of the mill senior lien holder doing the foreclosure. If it's a junior lien holder, still, they aren't going to bid anything after their total debt but other bidders might get into a frenzy thinking they are getting a screaming deal (If they didn't do their homework about other liens).

Even where its a run of the mill senior lien holder foreclosure, they still won't bid over total debt but, they might set the opening bid lower than total debt if their analysis shows the property to be worth less than total debt. I typically will bid on my properties in foreclosure a percentage of FMV instead of total debt where value may be in question. 90% of FMV would be typical for me when considering i've got commissions, taxes, maintenance, etc., so, i'll bid 90% to try to entice 3rd party bidders so i don't have to take it into REO inventory.