Fun and Learning at the Auction

So while I should be working on my marketing, instead I got wrapped into an auction this week. It didn’t suck away much time, and it intrigued me – so I went. And we could use a new project, so you never know.

Auctions come with all sorts of tangles and land mines, so maybe you can learn a little from my experience.

The auction was for 25 houses in Washington County (PA) – in a rural area near me. It’s not exactly what I’d call my sweet spot in location, but it wasn’t so far. The seller was an oil and gas company – they were going out of business or selling off assets or something. Their story didn’t matter.

First off, you’ve got to do your homework – on the terms of the auction (which I did) and on the houses (which I vaguely did). As for terms of the auction, that means reading lots of paperwork. The auctioneer had all their documents posted online so I went through the pertinent ones. The auctions were absolute (meaning no reserve price), 20% due on the day of the auction, and the balance due at a closing 45 days later.

Now the title stuff was where it got interesting. Title was to be transferred by quit claim deed. Some lawyer reading this can correct me, but essentially the seller is saying whatever interest in the property they may (or may not) have is what they’re transferring. But it was a little friendlier than just that – they did agree to resolve monetary liens. What they wouldn’t resolve was liens with no monetary value attached. So if a mortgage was there, it would be cleared – good. But if some other odd lien or title exception was there with no set dollar amount, then that became the buyer’s baby.

Then there’s the issue of current occupants. The seller agreed to terminate any leases and serve move-out notices. Trouble is that doesn’t really mean much. If you know anything about property management you know a tenant has a lot of rights, and a squatter has maybe even more! You could easily be looking at an eviction or worse an ejectment. What’s an ejectment? – well Google it – but it’s not good (or quick).

There’s also a potential landmine in a current lease granting the occupant additional rights – like a long-term lease – with no right to terminate it. Generally a lease transfers to the new owner by default. And nobody was offering up copies of the leases.

Now comes the real fun. The township where 10 of the properties were located required a dye test by the seller. The results were that 9 of the 10 had major septic system problems – requiring a $10-50K escrow (from the buyer – held until repairs are made). So if your thinking cap is on, you may realize it’s quite possible that a majority of the houses that didn’t require dye test also had issues. And – it gets better – several houses had “water buffalos” – large water tanks. That’s a pretty good sign that the wells are jacked up just like the septic systems.

So these all sound like real gems, eh? Thus the auction.

So what is the safe way to buy at auction? Easy – have a title search done, visit the property, get a look inside, etc. Some of that was possible but costly, some wasn’t even possible. My plan was to base my bidding maximum on a fraction of what I figured was the approximate fair market value. That and some gambling. The gambling part was if I bought something that really turned out to be a dog, I’d only be out 20% and could then pull out of the deal. I did check that you could bail out without being sued! Believe me I wasn’t going to bid on stuff that was expensive, so my risk was capped at a few grand. Maybe not the best approach, but not bad considering the cost involved in otherwise mitigating only some of the risks (some could not be avoided anyway).

So what become of it all? Nothing. A learning experience, actually. It was fun to hear the rattle of the auctioneer but all but one of the properties was bid well beyond what I was willing to pay – like two to three times that amount! Now one did go for less than my numbers dictated, but at that point, based on the insane bidding I had seen, I figured maybe I did screw up my numbers on that one!