In the old days, buying at auction at the county courthouse was usually an excercise in futility. Bank representatives were bidding up their properties close to FMV or simply bidding up to the amount owed on the note. Banks took back the properties, put them on the market and within a few weeks sold the property and recouped nearly the full amount of the forclosed note. These days, home values have plummeted and values are so depressed that banks are simply taking the highest price bid at the auction offered by investors and selling them off. The auction sales price is typically a fraction of what the previous note was and well under market value. It’s like stealing candy from a baby.
This past week, a friend of mine bought a house at auction here in Broward County, FL. It’s a 3/1 with a separate 1/1 in the back. House is fully rehabbed and in a beautiful area. The 3/1 tenant is paying $1,575/month and the 1/1 tenant is paying $700/month. The original mortgage note was $365,000. FMV is around $240,000. My friend bought it for $129,00. That is 53% of market value. He has cash flow of $2,275 with two stable tenants who have been living there for four years now. He can refinance this property, recoup his cash, and still $300-$400 monthly cash flow after PITI (principal, interest, taxes and insurance). A few years ago, there was absolutely now way you could have done this here in Florida. Welcome to Candyland.
If you plan on buying at the auction, here are a couple of points you need to keep in mind.
1. Due diligence – Obtain a list of the properties scheduled for auction from the county. You can get this information usually on the Web from the county’s website for a small fee. Select the targe properties that match your requirements, size, location, price range, etc. If the properties are in your areas, drive by the properties examining each one for any repairs needed. Look at the neighborhood for pride of ownership to to see if houses are well maintained. Take pictures. Run your numbers and determine the most you will pay based on the current after repair value (ARV). Depending on your area, your strike price will be in the 45% – 65% range which is also dependent on renovations that need to be done.
2. Exit strategy – What will you do with the property once you purchase it? Are you getting it cheap enough to hold longer term and rent for cash flow? Will you buy and flip it to another investor immediately? Will you buy, rehab and sell retail? Your exit strategy should figure into the strike price you will offer. For example, your discount price will be substantially more aggresive on a house you buy and flip to another investor (buy at 50% and sell at 55%) then selling to a retail buyer (buy at 60% and sell at 80%).
3. Know the players – At every auction, there are usually a few heavy hitters. These are the investors who have deep pockets and buy multiple properties. The heavy hitters usually know each other and sometimes have previous verbal agreements for bidding on certain properties. Of course, none will ever admit to this but keep a watchful eye on which ones they bid on. Don’t be intimidated by competing with them on the same property. Just bid up to your target strike price and bid no more. Hopefully, you will come out on top.
4. Cash is king – At the auction, they only accept cash. When you are the winning bidder, you have to put down a small 5-10% deposit and must remit full funds by end of business that day.
5. Curing period – There usually is a 7-day wait before you receive your deed. This gives any other party that may have an interest in the property to come forward and make a claim.
6. As-Is condition – Depending on how the property is conveyed, usually special warrantee deed, you are now responsible for any any all repairs, improvements, taxes, liens, on the property. This should be part of your risk assessment review during your due diligence period and hopefully, you bought it right.
Buying at auction can be nervewracking. Avoid jumping on the bandwagon and letting your enthusiasm cloud your judgement during the euphoria of placing bids. Those that make the mistake are usually first time auction buyers and they often pay dearly for their lack of judgement. I have seen these first timers pay nearly market value for a house I would never have paid more than 60% of ARV.
Due your research, plan your process, formulate your exit strategy, stick to your strike prices and follow your rules. With any luck, you will snag a great deal
No related posts.
