HI BP -
I'm wondering if there are any local REI professionals that purchase from live auctions, Auction.com, or any other sites? I'd love to learn a little more about how it works in real time.
We bought our first flip house at a live auction from Williams & Williams, I was the only person there but bidding against 4 other online buyers, the auctioneer took bids in an earpiece then announced them and looked at me to indicate it was my turn to bid. I bid about 5K higher than I had planned to but really wanted the house and was OK going over my ceiling bid by that much. I brought a cashier's check (I think for 5K) for the down payment and signed all documents right there. Don't remember how long it took to close, most of it was done electronically and perhaps with a notary. We also bought once off Hubzu, bid online, the local listing broker showed me the house and I signed all docs with him. Auctions typically say "cash only" but what they really mean is "no conventional mortgages" (you would not be able to get a conventional mortgage on a flip house anyway). I just tell them we use a hard money loan, no one has ever complained about that, they just want someone to pay for the house. Once we have a property under contract, I present the deal to my HML and the title company does their thing and we close. I have won bids on Auction.com but backed out for various reasons. I have also bid many times on Auction.com and not won, I think their reserves are unreasonably high, I see the same properties sitting on that site for months and months. The auction process goes from unknown and terrifying to unimpressive and unremarkable very quickly once you get through your first one!
@Jennifer Petrillo , thank you! Very detailed.
Do you have a diligence period where you can look at the property in person before buying? Say, there's an oil tank in ground that spilled and contaminated the soil. The repairs may be make the flip not worth it. Or your HML pay back how. How do you reconcile this problem?
How do you do with tenants or prior owners that are in the home?
How long does the process typically take from winning bid to ownership?
I won't buy stuff that has people living in it, although I have bought stuff that had squirrels and mice living in it. Drive by the house, peek in the windows, I have seen many auction properties listed as occupied when it is obvious on visiting them that no one has lived there for a long time. Banks don't know what they are listing, they are wrong about property size, # of bedrooms or bathrooms, occupied status. They literally are in another state and don't know and don't care about the asset. We snapped up a small Cape Cod last year for 140K, the listing did not mention that it was on four acres of farmland with pastures and a barn, we rehabbed and resold it for 395K, made 75K on the deal. If they had put the property size in the listing, and if the appraiser had had a clue, it would have sold much faster and for a much higher price. But...their mistake, our gain!
I always sign the contract "contingent on financing" so I have an out. It is understood you are buying "as is" but you can always contact the local listing broker to see the house before you bid. At this point I just do a driveby, I am more concerned about location, neighborhood, size of house and property than how distressed it is. You make your money when you buy, so you want to buy low enough to have enough margin to cover rehab plus your profit at the end.
Things like oil tanks they generally know about and must disclose. If it has not been reported to the state yet (if there is not an open case # on it), you can have them removed for about $1200. If there is a spill, or an open case #, it will cost more. We had to remove one once and do extra soil testing and I think we spent about 7K total on that. Sometimes you will have a septic report too, sometimes not. We just assume the septic is bad and add 35K extra into our rehab estimate (though the last septic we put in cost 50K--complicated pump up system with mounded leech field due to high water table on site--so the difference came out of our pocket).
Closing is 30-60 days, sorry to be vague on that, but I've only done auction twice, usually buy distressed foreclosures off the MLS, which can close in 30 days as well, all depends on the seller and the title work.
I've been to a few local Sheriff sales in the past few weeks to get a vibe from them. Pretty interesting, you should search your county and find the date and time for the sheriff sale and get the experience. it is a good place to network as well.
Every auction has terms and rules that most likely vary from each other. You can start by read the terms and conditions of each property that you look at on these websites. Auction.com (https://www.auction.com/lp/learn-more/) gives information directly on their website.
@Jennifer Petrillo , how competitively priced are these homes?
I understand it's an auction - but do the reserve prices prohibit turning a good profit? Assuming you don't have an exact estimate of repair value (but likely a better idea of ARV), do you target a specific margin? ROC?
I go into it with a rough estimate on repair costs and an idea of the ARV. Then you decide how much you want to pay at auction and stick to it. Some people use the 70% rule: Take 70% of ARV, then subtract rehab costs, you should pay no more than that for the house (so if the house is worth 100K ARV, 70% of that is 70K, then subtract your rehab costs--let's say 20K, then you should offer no more than 50K for the house, leaving you with a 30K profit). There are also "absolute" auctions, which are auctions without a reserve price and it sells for whatever it sells for. Reserve prices do no necessarily inhibit a profit, just depends on how high they are. In my area, the banks are getting tighter with how much profit margin they will leave leftover for investors.