Setting Auction Bid Price: Be greedy or take the easy win?

20 Replies

Wondering how people treat this scenario:

- Good looking asset and well maintained exterior

- Appreciating area (+$3k-$5k per month in zillow value)

- Currently owner-occupied, owner has been 100% unresponsive through FC

Potential Profits:

Scenario 1: Interior in good condition for area, but still needs some minor work: $25k profit

Scenario 2: Interior updated and no real work needed (have been told by a realtor who was in the property in 2012 that it was updated and 'very nice' (granite, etc.): $45k profit

Scenario 3: Interior needs a lot of work / other issues come up: $10k profit

Where would you tie your auction profits? I am struggleing accepting a $10k profit at auction, when, I think there is a ~50% of scenario #2.

I think that in this business, when you find a quality asset, you should get everything you can (because there will be many you really hope sell at auction).

Originally posted by @Matt K. :

4) zillow comps are way off and even in decent condition you lose 10k+

5) zillow comps are way off and it's destroyed you lose a lot

Always a risk.

So you would take the $10k? At what point does your risk/reward meter take over?

This is a 15-30 days on market subdivision with 30 nearby sales in the last few months (none distressed) that support, on the low end, the estimated value.

What kind of numbers we actually talking? Purchase price, carry/closing costs, profits?  Don't taxes eat up good chunk of flip profits? If I was to plunk down 100+ to get 10k pre tax I'd probably pass seems like a lot of risk...

I'm just assuming that you're likely going to have to do cash for keys and it'll take a while to get them out and get it on the market. Then you'll be at the holidays and buyers will slow down etc etc... and your carry costs will eat up that 10k and you're going to break even.

But I do the buy/hold and 1031 thing... not flips so maybe I'm way off.

Originally posted by @Daniel E. :

Wondering how people treat this scenario:

- Good looking asset and well maintained exterior

- Appreciating area (+$3k-$5k per month in zillow value)

- Currently owner-occupied, owner has been 100% unresponsive through FC

Potential Profits:

Scenario 1: Interior in good condition for area, but still needs some minor work: $25k profit

Scenario 2: Interior updated and no real work needed (have been told by a realtor who was in the property in 2012 that it was updated and 'very nice' (granite, etc.): $45k profit

Scenario 3: Interior needs a lot of work / other issues come up: $10k profit

Where would you tie your auction profits? I am struggleing accepting a $10k profit at auction, when, I think there is a ~50% of scenario #2.

I think that in this business, when you find a quality asset, you should get everything you can (because there will be many you really hope sell at auction).

If I can get a property to sell at auction, I'd take that all day long vs owning as an REO as the carrying costs eat up any profits very quickly. It's also about the velocity of capital, taking an REO will add a MIN of 3 months onto your holding period and that's a perfect world.

@Daniel E. In general, it depends on your business model. We're coming to realize that we make the most of our profit in a deal from buying the note at a discount, fixing any obvious problems to get the note "on track," and re-selling to another note buyer or selling to a 3rd party at trustee sale. It takes more work and risk to capture whatever upside is remaining as opposed to putting our capital back into the next deal. 

Is your note in NC? If it is, it's different than most other states in that you can only collect your opening bid and that's it. You can't set the bid low and let the bidders bid up the price and collect the higher amount. It sucks.

So, what's your business model? Do you have another deal lined up so you can re-deploy capital quickly? Or do you need to squeeze every last penny out this loan? Some people, especially fix and flip investors, don't mind taking it to REO, rehabbing it, and selling at full market.

I’m a bit confused: are you figuring out what to bid as a buyer at auction or are you trying to figure out the minimum bid you’ll accept as the foreclosing note holder?

I’m guessing the former.

I agree with @Chad U.
I want out as fast as possible. I just had a property that the lender had interior pics from a year ago that the house was in good condition and a realtor BPO of $80k. Well the homeowner decided not to fix a clogged drain and ended up with a swimming pool In his basement. Value now $30k. Insurance doesn’t cover stupidity unfortunately

Thankfully I got the note on the cheap and didn’t lose my shirt but it’s like hitting on 14 in blackjack - sometimes you win and sometimes you lose

Why not hire someone to deliver a pizza to the house and take a quick peek at the inside for you ?

I agree with @Chad U. I want out of the deal ASAP. Also why not get creative and get eyes on the inside of the property ? Have you sent a door knocker ?

Bidding on a property without seeing it is always a gamble. I’d I only bid at worse case scenario numbers and walk away at a finite point. Then just wait for a property you can properly inspect and make a more realistic bid.

Thank you all for the guidance. 

For reference, we are talking about the min bid accepting as the foreclosing note holder.

As mentioned above, in the end I think this is a strategy discussion. We have other opportunities and need max capital to re-deploy. If we were up and running, I think we would take the easy pay-out. At this stage we need the reward that comes with the increased risk.

@chris Seveney 

Why not hire someone to deliver a pizza to the house and take a quick peek at the inside for you ?

Interesting idea. How would you approach this? Hire someone on craigslist to fake deliver a pizza?

I have always started my opening bids at a point that I was fairly certain it would sell 3p.

keep these things in mind.

1. no sales costs.. 

2. you get a check and it cash's 

3. no inspections no reps and warranties to condition or title 

4. bird in the hand.

5.. there is always another deal

@Chad U.   one of my favorite plays I had was buying notes from a thrift here in Oregon 2 to 3 weeks before the sale.. they did not want OREO on the books and have to mark to market.. I got nice deals on them.. substitute trustee go to sale without changing the sale date.. I set the opening BID and 97% of the time I was getting a check from the foreclosure trustee within a few days post sale.. so in an out in 30 to 45 days with nice gains.. Then Ms Pickle ( that was her name) who was Manager for all of Oregon retired  new guy comes in and he is not interested in selling me the notes anymore so that gravy train dried up. 

I would NEVER want to take the property back unless I bought the note with the specific purpose to do so.. I only buy them to get cashed out at the sale.. There by spinning the return COC into the 100 to 300% rule.

@Jay Hinrichs what a great gig! You had a great connection, solved your sellers problem, and had enough margin where you could sell it at the sale. Brilliant! It's making a lot of sense for our Fund to do the same thing. Funny how your business model affects your perspective. Some noteholders never want to take the property back. Rehabbers that buy at trustee sales hope to buy what you want to get rid of and are excited to pick them up!
Originally posted by @Andreas Mirza:
@Jay Hinrichs what a great gig! You had a great connection, solved your sellers problem, and had enough margin where you could sell it at the sale. Brilliant!

It's making a lot of sense for our Fund to do the same thing.

Funny how your business model affects your perspective. Some noteholders never want to take the property back. Rehabbers that buy at trustee sales hope to buy what you want to get rid of and are excited to pick them up!

for sure I work both sides of the Isle and have for years and years.. Only thing I PERSONLLY did not care for was nursing NPN homeowners back into compliance and dealing with all of that.. That is a JOB and tough one.. some are lay downs some are Donnie brooks.. that space in my mind needs to have a lot of volume so you can throw the occasional bad one out with the bath water..

I just cringe when I see these folks who have never bought a note and think they can buy ONE npn and make it work.. maybe maybe not.

and usually much more work and cost then the guru told them ..  

@Jay Hinrichs - I cringe as well but just remember after they buy five they are a guru and start their own training program

This response is not about any of the above posters but about he overall number of “gurus” entering the space and having their own training program

Originally posted by @Abel T. :

@Jay Hinrichs - so the thrift was selling you the notes to avoid the 3% chance it becomes an REO and they have to mark to market? That's amazing ha

 well if they full credit bid they would have owned them they discounted the notes to me .. I did not pay par for them.

Originally posted by @Jay Hinrichs :

 well if they full credit bid they would have owned them they discounted the notes to me .. I did not pay par for them.

Ah ok, think I follow now. So if they set the foreclosure bid at the full balance they would have probably ended up with an REO. And if they set the bid at less than the full balance, there would still be a chance that they end up with the REO (if no one else bid). So rather than deal with either of those scenarios, they just sold the note at a loss to you and moved on

Originally posted by @Jay Hinrichs :

I have always started my opening bids at a point that I was fairly certain it would sell 3p.

keep these things in mind.

1. no sales costs.. 

2. you get a check and it cash's 

3. no inspections no reps and warranties to condition or title 

4. bird in the hand.

5.. there is always another deal

@Chad Urbshott  one of my favorite plays I had was buying notes from a thrift here in Oregon 2 to 3 weeks before the sale.. they did not want OREO on the books and have to mark to market.. I got nice deals on them.. substitute trustee go to sale without changing the sale date.. I set the opening BID and 97% of the time I was getting a check from the foreclosure trustee within a few days post sale.. so in an out in 30 to 45 days with nice gains.. Then Ms Pickle ( that was her name) who was Manager for all of Oregon retired  new guy comes in and he is not interested in selling me the notes anymore so that gravy train dried up. 

I would NEVER want to take the property back unless I bought the note with the specific purpose to do so.. I only buy them to get cashed out at the sale.. There by spinning the return COC into the 100 to 300% rule.

I've done this several times myself , buying late stage foreclosures hoping to make quick buck if it sells at the auction. In general it sells to 3rd Party 50% of the time and take back as REO the remainder. However, there has been the odd one here and there where the borrower files BK the day of or day before, which then prolongs the hold period and ties up your capital much longer than anticipated. If it's an appreciating market this isn't the end of the day as you can recoup your opportunity cost with a higher ROI.

@Chad U. Were making a play like this from the other side. We bought an NPN in Chicago for $59k in February. We got the loan on track and have a FC date at the end of the month. We're selling the loan for $93k. As is, the property is worth $130-$140k. ARV could be as high as $160-$170k.

If we held it, the best case scenario would be that it sold to a 3rd party at sale. We'd probably get the proceeds a month later when the sale confirms. Worst case, borrower files BK or forces an eviction and we'd be looking at liquidating in the spring time next year. In Cook County, there are basically no evictions once winter sets in.

To us, much better to have the certainty of a solid win and pass on the upside potential to the next guy....