The allure of the “steal”

Bidding at real estate auctions always attracts a certain segment of property investors. Whether it’s government auctions (gov auctions), foreclosure auctions or seized property auctions, certain types of investors are attracted to them.  Call it the art of the steal…And there are a number of very large property auction companies that cater to, and aid in, the selling of distressed properties to investors. Some of the top auction houses include REDC (which is now known as Now Auction.com), Parrott Auctions.com, and Williams Auction.com.

Over time, I’ve developed a theory that auctions are alluring to two basic subsets of the real estate investor: the hardened, experienced pro, and the novice looking for the “steal” of a deal. It’s easy to spot the pro in the room – they’re the ones with the steely gaze, and the dispassionate air of someone who just doesn’t give a damn whether they acquire a property or not. They’re also the ones who have done their homework: they know exactly which properties they will be bidding on, what the market value of each property is now, and after they improve it, and have an exact “upset” price written down for each of those properties. That’s the price that over which, they simply stop bidding and let someone less experienced take their lumps on by overbidding and ultimately purchasing.  They also are quite skilled at estimating their renovation costs.

The novice, on the other hand, is someone drawn by the extreme allure of making a steal of a deal. Usually, they have not done their homework, crunched the numbers, researched the area where the property sits, and think that, in absolute numbers, a low price equals a steal. Boy, they couldn’t be more wrong. And they traditionally last about, oh, one auction. Then they get burned financially, and leave the next auction for the pros – and for more novices to take their place.

An instructive tale of woe

For an illustration of the large downsides of auction buying for the novice, let me provide a highly entertaining example of a recent exchange I had with such a novice auction investor. As a real estate broker, I had gotten a call from a novice buyer who had purchased a small three bedroom single family house at auction a year earlier. He had done nothing with it – yet – and wanted to, as he put it, “unload it quickly.” And he wanted my estimate of its current market value.

Since he lived hundreds of miles away from the property, I asked him for a key to gain access. He said he did not have one. I asked if his tenant had it. He said he did not have a tenant. Upon further questioning, I figured out that he was not being very forthcoming (I assume out of sheer sheepishness for buying this turkey of a property), and that he had never even seen the property in person. Yikes. I was dealing with a definite novice auction buyer. One who had not done any research whatsoever as to the market, current condition of the property, or what the value would be if he improved it.   I performed my normal regimen of research, and saw that he had purchased the property at auction for the very modest sum of $2,100. I’m sure he thought he could make a killing on it. Ugh…

Will the fun ever end?

I went over to the house, which was situated on a small, but secluded lot, far away from the center of town in which it was located. I was able to make it through the first line of overgrown grasses and shrubs to the front porch. As I peered in, I saw the place was utterly trashed as, alas, many foreclosures and county-owned properties can be. Prior owners just feel the need to “get back” at the big bad lender who held their mortgage, and who forced them out. It’s a simple reality in the property investing business, and we tend to get inured to the sight. But in addition to the house being in such a sorry state, it also had a tremendous amount of wood rot visible to the naked eye, and I felt unsafe even being on the front porch. In a way, I was glad he hadn’t sent me a key. (Yes, the front door was locked.)

Costly mistakes…

I quickly saw that the property in its current condition would have to be sold for its land value only. Unfortunately, that would not be much more than what the novice paid for the property. Further, I told him I did not want to represent him (liability problems galore there – especially if a potential buyer falls through the floor), and of course, there was little money to be made in the simple brokering of any deal. To make matters worse, I felt the renovation costs to bring the house up to rentable, or market value for-sale condition, would far outstrip the amount he could get for the property when he sold it. My recommendation: best to get out now, list it on Craigslist, and try to get out for close to what you paid for it. He of course has already been paying carrying costs like taxes and insurance on it for over a year already.

Are real estate auctions investing for you?

This little tale of woe should be heeded by any property investor considering jumping in as a novice to the property auction bidding process. If at all possible, and if it interests you and you have the right temperament, go in and watch the pros, and how they conduct themselves at auction. Ask them how they do it – every experienced auction property investor has their own unique “system.” Learn from them before diving headfirst into the auction waters. You’ll save yourself the grief of someday calling a Realtor saying you’ve got this piece of property you bought, sight unseen, that you need to unload…quickly.

 

photos courtesy of roarlocal.com,  giyum.com, mcginnisauctions.com, houstonauctioncompany.com, howtobuyusarealestate.com,  realtor.org