Is An Auction For Me?

There are numerous ways to take advantage of distressed property sales today: short sales, foreclosures, auctions, and private sales. Each has advantages and disdvantages. Let's focus on auctions today. We will look at public auctions held by auction houses, not Sheriff sales.

Public auctions of real estate can be daunting, but don't have to be. What if I really want to buy a specific property? Will I be bidding against seasoned investors who will bid the price up beyond my price? Worse yet, will I accidentaly buy a property because I rubbed my nose or waved to a friend. There are a lot of myths about public auctions which need to be disspelled.

First, if you intend to buy a specific property at an auction, do your homework. You need to have your strategy clear. Are you buying it as a principal residence or as an investment property? How will you hold title? How will you finance the purchase and any necessary renovations? Engage your trusted advisors: accountant, attorney, property inspector, lender, and real estate professional. Answering these questions is key to guiding your actions. It is well known, that you make your money when you buy real estate not when you sell it. If you do not understand what this means ask me. You need to be very clear on your ultimate exit strategy and have a good idea about timing.

Then go visit the property and learn as much as possible about the history and potential issues with it. This is a real good time to engage your trusted real estate advisor. In most cases, the party selling the property is prepared to pay for your buyer representation. You should visit the property with your agent and they should prepare a Comparative Market Analysis (CMA)for the property both in its existing condition and after improvements. This is the information you will need to formulate the upper limit of what you will pay for the property and how much room you will have left to make repairs and renovations while protecting your profit margin and downside risk. It can also be a very good idea to have a professional property inspection done at this time.

It's a good idea to put together a detailed list of all of the repairs and renovations required for this property. With this budget in hand you can model the property financials. For investors, I have a robust financial model which calculates the buy-in captialization rate, the projected sale capitalization rate and the financial hurdle rates. It can be used to develop "what if" scenarios and develop contingency plans.

Gather all of the bid documents and get them to your attorney for review. This will include things like the purchase agreement, disclosures and other contractual agreements with the auction company and the seller. You need to have these reviewed and you will be asked to sign a waiver saying that you have been given the opportunity to have them reviewed in advance of the auction.

When you go to the auction, you will register with the auction company. You will need to have a certified check in hand for the amount they have specified. This check can be made out to you and is proof that you have the funds necessary to bid. It is also usually the amount that you will have at risk if you bid successfully, sign the purchase agreement, but decide not to go ahead with closing on the property. This is referred to as "liquidated damages". If you do not bid on a property or do not bid successfully, the check can be returned to your bank for cancellation.

As you enter the auction hall or ballroom, there will probably be a lot of hubbub. This is an exciting moment and the auctioneers are there to create an atmosphere of frenzy. It is their job to get the highest price for the property and they are good at working the crowd to get the bidding going hot and heavy. You will have been issued a paddle or numbered card to indicate that you are bidding on a property. The floor assistants to the autioneer will work specified areas of the floor and manage the bidding. Floor assistants will try to get the bidders working against each other, but they will be constantly checking that a bid is real and understood. They won't confuse a bid signal with a nose rub.

Going, going, gone. When the property is presented, the auctioneer will bring to the attention of the bidders any special conditions regarding the property which will also have been included in the property bid package. These might include special items such as pending issues with the city or municipality, mold or other disclosures, and minimum reserves or the hurdle price which the bidding must overcome for the property to be sold at the aution. However, do not rely on the special disclosures to take the place of having done your own homework. Once the property bidding price has overcome the reserve, the auctioneer will announce that the next successful bid will buy the property. Now is when you need discipline. If you have done your financial analysis and contained your emotions, you will either continue to bid or you will walk away if you go beyond your price. Remember, other bidders have other financial models and targets and may also let their emotions get the better of them. Also, do not forget that there will be a buyer's premium (maybe 5%) which will be added to the final price.

If you have been succesful in your bid, you will then go to a separate room to finalize the purchase agreement and other documents, receive special instructions and contact information, and orgainze the timing of your closing. Most likely, this paperwork will need to be forwarded to the party (usually a bank) owning the property to be reviewed and negotiated or a verbal agreement will be reached. Later, you will be instructed in writing if your purchase offer has been accepted. Use this time to revisit the property and finalize your plans. Then it's time to get your money together, close on the property and start working on it.

Auctions can be great opportunities to get real estate at well below market prices today. Remember to engage your trusted advisors: Accountant, Attorney, Lender, Property Inspector, and Real Estate Professional. Have a plan, follow your plan not your emotions, and have contingencies.