So you think you don't do auctions?

You Think You Don’t do Auctions?

 

When most investors think of auctions, they think of the courthouse steps. 

But, all real estate transactions in form or another, are auctions. It’s important to recognize each type of auction and know when to bid and when the deck is stacked against you. Here’s a breakdown of the main types of auctions:

 

The Open-Outcry

 

This is what we typically think of when we imagine an auction. This is most commonly seen at the courthouse steps in a foreclosure auction. Many investors either love or avoid this type of auction for two major reasons- all players are privy to all bids and the price is ascending. In other words, the auction ends when one investor bids higher than any other is willing to bid and walks away with the house.

 

Rarely in real estate do we see an entirely descending price auction, where a bid decreases until an investor decides to pay the stated amount for the property. There are circumstances, when if the auctioneer’s minimum starting bid is unacceptable, he will choose to drop that bid until an investor chimes in. This, in and of itself, is a descending auction, but more than likely, an excited investor who held out is now willing to play and bids begin to climb again.

 

The Sealed-Bid

 

Another common type of real estate auction is a sealed-bid, where all investors’ bids are kept private and the auction demands each investors’ highest and best bid. Most sealed bids are first price auctions- highest bid wins (think listed REO property). 

 

Another version of the sealed-bid auction is the second price auction. In this version, the winning investor doesn’t actually pay his exact bid, but some figure in between his bid and the next highest bid. This is exactly the scenario played out in a multiple-offer situation where such offers include escalation clauses (think listed fixer properties with offer deadlines).

 

If you are a buyer, consider this: in some sealed-bid auctions, the seller may explicitly state that he/she has a right to reject all bids and not sell the property. Although this would deter some investors from bidding, it does protect the seller from selling the property for less than what they think it is worth. Which leads us to the following...

 

Single-bidder Common-value

 

This sounds like an overly complicated type of auction. However, this simple and popular type of auction dominates most wholesale and rehab investers’ careers. It occurs when a single investor makes an offer to a single seller. In this type, both the investor and the seller only have an estimate of what the house is worth. If they both calculated the house’s worth equally, there wouldn’t be a deal at all. The seller will only sell if the investor offers more than the seller thinks it’s worth, and the investor will not offer more than he/she thinks it’s worth. So, the only way an investor wins in this type of private auction is when the investor values the property more than the seller. Sounds overly simple, but remember, a starting bid hasn’t been set. Each party has an estimate, nothing more. 

 

This is why many investors choose to offer additional services or incentives to increase the value of their offer. If the investors’ bid is significantly lower than the seller’s estimated worth of the property, these additional services can help bridge the gap. 

 

How so? 

 

Popular value-added incentives include fast cash, quick closings, complementary move-out or trash-out services, waiving inspections, etc. Here’s why this works: The value of these incentives is very difficult to quantify. Waiving an inspection is often viewed as a great incentive, but no one can actually put a dollar value on this. 

 

By adding these services, it’s much more likely a seller will value them higher than the investor, and suddenly the investor’s starting bid begins to look very enticing!

 

 

Auctions in real estate are not only exciting, but more common than you think. Any time you make an offer on a property or sell a property, you are engaging in at least one type of auction. Each has it’s own strategy and potential pitfalls. 

 

Bid away!