Newbie looking at first Auction purchase

20 Replies

Hi!

I’m new to real estate investing. I’m looking at a townhome in my area that’s on auction for a starting bid of $37k with estimated resale of around $200k

I would plan on using it as a rental and it could probably rent for about $1000-1100.

Is there anything special I should know about auction purchases? Are there hidden headaches?

This seems like a good opportunity.

Thoughts?! Thank you!

That starting bid is an irrelevant teaser....the undisclosed reserve is Much higher.  If you get the property use do Not use their title co. for the “free” title insurance, it can have all kinds of exceptions, and it’s not free as they add a bunch of junk fees.

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Thank for sharing! @Wayne Brooks, thanks for mentioning the need to use your own title company.  I am new to the investing world and have been attending  and bidding on auctions this past month.  I am working on investigating non-title related issues like code violations, but not sure where to start.  Thanks again @Ali

@Ali Parnell

Hi Ali,

An undisclosed Reserve means the seller has set a minimum amount below which they will not sell the house. So if you were to win the house for 34k, this does not meet the reserve and they would not sell you the house.

This is a strategy to drive up interest. I have a similar situation near me where a house is listed for 74k on an auction site with the notation that this has not met the undisclosed Reserve. Looking at property records, Zillow, and other sources, I'm guessing the reserve price is somewhere around 105K. The strategy is this: if they list something at such a low price, there is more interest and more folks likely to bid on the auction. More folks interested and paying attention/following the auction generally means they will get a higher price in the end.

Unfortunately, to my knowledge, there is no way to know what this reserve price is. Hence the term"undisclosed". Good luck though! While others may have more insight, my guess is the reserve price for a 34k home is probably in the neighborhood of 50-65k. That is purely a guess though. Good luck!

@Ali Parnell @Steven Griffith

Typically the undisclosed reserve becomes disclosed within a few hours of the auction starting if you're "attending" online auctions. If the auctions are taking place in person, along with some of the online ones, you'll have to look at comps and research the area to get a general idea of what they might expect it to sell for. The reserve price is to safeguard the seller from losing money from my understanding. Hope that helps and if I'm wrong on anything please correct me.

@Ali Parnell As mentioned, their reserve price is the minimum price the bank will actually sell it for.  It’s probably 80-90% of what they Think it is worth in it’s current condition, it could be more than what it’s worth.  If the high bid doesn’t meet their reserve, they may accept the high bid, may counter, or schedule it for another auction.  Many properties get rescheduled a half dozen times.

What kind of auction is this?  Is it a foreclosure?  Not being able to see the condition is a major one.  

If it is worth 200k ARV there will likely be enough competition to where if it is in poor condition there will be very little profit.

If it's a public auction on a foreclosure, you'll see what the "reserve" is on the notice of sale (non judicial) once published. They may not actually set that as the reserve but that will be notice of how much is owed, which is not relevant unless what is owed, is less than value. If so, they will sell for total debt. If not, they will sell at a percentage of fair market value, typically.

Hi @Ali Parnell things you should check for before going to the auction are;

1) Title. Make sure whoever you know each judgment/mortgage after the most recent warranty deed and who is foreclosing.

2) Call the local municipality for any unrecorded bills (lawn mowing, etc)

3) Have certified checks / money orders for a down payment.

@Ali Parnell

Well it depends aucitons are bit more risky but can be great deal also depends how many people bid for it and ofcourse how much on example here in croatia all real estates cant be bought in auction less then 2/3 of worth vry rare 1/2 but if you are only one at auction or there is some people but they dont bid much you can earn some profit here some aucitons have open house in exact time day before you need to confrim coming to auction so there is a cool trick you can go there and if you are the only one there is a big chance you will end up on auction alone and take the on example house for 2/3 its worth and flip it becouse the day you need to confrim it you also need to send like 10% cash of house worth and then they give it back to you if you dont buy the house. Im not sure if that kind of things you can do in USA but if you can its nice tip also auctions can be good but be patient dont rush if you think its bad purchase :)

@Ali Parnell

Pictures! Get current pictures, or verify those that are posted on the auction site are the most recent by looking at the County Assessor's website, Google Earth, etc.

I bid and won a house just recently only to find out later, that another house was less than ten feet away from the subject property. Photoshopped? Quite possibly since I discovered the house missing in the street view was constructed the same year as the house I bid on and won.

@Ali Parnell
Before participating in an auction, consider the following:

  • attend an auction for a comparable property to build your familiarity with the fast-paced process
  • review the terms of the sale - most auction companies will have a sample contract online
  • ask if you can preview the property several days in advance of the auction

@Courtney Rollins
Have you used Baltimore City's CELS/CodeMap?
http://cels.baltimorehousing.org/codemap/codemap.html

You can also view citations and violations by searching Code Enforcement' Search Docket
http://cels.baltimorehousing.org/Search_On_Map.aspx

@Ali Parnell, If this is a foreclosure auction, and you determine that this Town Home is a property you want, then it is worthwhile to consider purchasing next in line Junior lien(s) at a discount prior to the auction.   Owning a 2nd lien, or a 2nd and 3rd lien can often insure that you are the winning bidder, or can become a significant quick profit if you are outbid.  

For example if the target property has a value of $200,000 and is being foreclosed to cover $70,000 1st mortgage, but also has a 2nd mortgage of $50,000 and another 3rd in line lien of $30,000, then there is a total of $150,000 in debt secured by mortgage and lien on the property.  The holder of the first only cares about the $70,000 they are owed.  The foreclosure sale by the first mortgage holder wipes out (or pays off) the junior mortgages/liens.   

An effective strategy can be to obtain (at a discount) an assignment of the 2nd mortgage holders rights, and similarly to obtain a subsequent assignment of the 3rd lien.  You would obtain the 2nd and 3rd at a discount by contacting the person, business, or bank that owns the 2nd and 3rd mortgage/lien.   Ask them if they plan to bid on the property to protect their lien?   Private parties in particular are usually pleased to talk to others who are interested in what they are owed.  More often than not, they have given up on trying to collect.  Remind the holder(s) of the 2nd and 3rd position liens that their security (their mortgage or lien on the property) will soon be wiped out by the foreclosure.  Then offer them 10 cents (or more) on the dollar for an assignment of their rights.

Then at the foreclosure auction, you can bid the $70,000 that the foreclosing entity is owed plus you can bid the full value of your just purchased 2nd mortgage and 3rd position lien.   At the auction, it won't matter that you received a steep discount when you bought the 2nd and 3rd,  you just bid the full face amount owed at the auction because you are now the one who is owed the full amounts due under the 2nd and 3rd.  In this example you could bid $150,000. ($70,000 owed on the foreclosure by the 1st mortgage holder, plus $50,000 owed on the 2nd (which you may have purchase for only $5,000), plus $30,000 owed on the 3rd (which you offered only $3000 for).

If your $150,000 bid wins the property, it cost you only the $70,000 owed on the foreclosure plus the $8,000 you paid for the discounted 2nd and 3rd.   By buying the 2nd and 3rd at a steep discount, it cost you only $78,000 to bid $150,000 on a $200,000 asset.  

And it works out just as well for you if you are out bid.  If you bid $150,000 and another party bids more, you'll still profit $72,000 because the winning bidder will now pay off the 1st mortgage, plus pay off your $50,000 second mortgage that was assigned to you as well as the $30,000 3rd position lien that you bought the month before the auction.

Of course, junior liens do not always exist, and even when they do, they are not always available at a steep discount.  But, you may be surprised at how often they are.  And since a serious bidder will obtain a good title report, you will always know when a junior lien exists.  If it is a property you want, and it has sufficient equity, then offer to buy an assignment of the junior liens.   Best to youl

Thanks Michael.  I am adding these resources to my toolbox!

Originally posted by @Michael Schleicher:

@Ali Parnell
Before participating in an auction, consider the following:

  • attend an auction for a comparable property to build your familiarity with the fast-paced process
  • review the terms of the sale - most auction companies will have a sample contract online
  • ask if you can preview the property several days in advance of the auction

@Courtney Rollins
Have you used Baltimore City's CELS/CodeMap?
http://cels.baltimorehousing.org/codemap/codemap.html

You can also view citations and violations by searching Code Enforcement' Search Docket
http://cels.baltimorehousing.org/Search_On_Map.aspx

@Steven Griffith @Ali Parnell @Matt Honeyford

So I'm interested in buying at auction OOS in Huntsville AL, Jacksonville / central FL area, or Clarksville TN. 

Here's what I have so far:

1) title search - hire your own title co for this - not the auction site's title co @Wayne Brooks

2) Call municipality for unpaid bills. I would add call Bldg Dept for any open permits.

3) Hire contractor or someone to do a drive by and take pictures, get a sense of condition. (Do they only let you go in ahead of time if its unoccupied?)

3)  Review terms of sale

4) Decide on max bid; get cashier's check

I've also heard you should work w a RE attorney prior - true? / what are the reasons for this?

What are the implications of purchasing a property that's occupied besides having to possibly evict?

@Tina Huffman If the occupants are squatters, you have the risk of the property being vandalized or worse (e.g burned down). Acquiring insurance to protect my interest would be my number one priority.