Auctions, What could go wrong?

[Ed Emmons]

 This may be a little bit lengthy but I think people could learn from a recent purchase I made. I closed on a house yesterday that I bought at an auction.  I have purchased at least 30 houses at auctions so it’s not the first one I have done. 

 When you buy it at auction they do not guarantee anything. You are buying as is where is and is it in this case if it is. 

 This was an auction online and it is a 4000 square-foot house built in 2005 with approximately 100 acres of land in a good location. I noticed only two people bidding within the  last day of the auction. 

 So I decided to investigate. Sometimes the best source for information on a property are the neighbors. So I spoke with the neighbor and he said that the house was not actually on the property but partly on his land and there was no water to the house.  This was because the well that fed the house also fed his house and he was the one that lost the house to the bank so he shut the water off. 

 Of course I try to make friends and build rapport. So I agreed as to how terrible the banks were etc. and I made an agreement with him that if I could buy it we would adjust the lot line so to speak so that the house was on the correct property in exchange for a small Bungalo house that was out front  which was also part of the large property. 

 I also contacted a realtor to get me inside the property. I also did a soft title search on my own and contacted town assessor and code enforcement.

 So I went back to the auction and when there was 10 minutes left the bid was only up to approximately 1/3 of what I figured I would be willing to pay for it with the information that I had. So with five seconds left on the auction I entered my bid.  I was hoping that the other bidders were not watching the auction because usually they will keep the auction open for an additional two or three minutes if there is action.  As it turns out they were not watching the auction and I won the bid for $79,000. However the bank did not except that offer as it was too low so over the next month there was negotiations between the bank, me and the next highest bidder.

The bank came back with $155,000 as the minimum that they would take. My high bid was $129,000.  The realtor estimated $70,000 in repairs and we figured for a quick sale it would be $285,000.  The realtor is a developer and has knowledge of repair costs. But I figured I could do it quite a bit cheaper but I used her numbers. 

 Evidently the second highest bidder came up close if not met their $155000 so they informed me that I was out.  Then two weeks later I get a call saying that the other bidder had not got their paperwork together yet. They asked me if I was still interested at my high price which was 129. I said yes and within one hour I had all the paperwork in their hands ready to close.   They signed a purchase and sale agreement for $130,000.  I now had 30 days to close. 

 I then had the property surveyed and concurred that the neighbor was correct the lot line did go through the center of the house so my surveyor made the adjustments as we agreed.  It cost me $4900.  I then went through the house made up a scope of work I even had some my contractor start work on it.  Granted this can be risky since I do not as of yet actually own the house but I have bought many houses at auctions and I have been successful with the strategy in the past. 

 So when I actually closed on the house I had already cleaned it out, the painting was almost complete, the heating system was thawed out, repaired and working, and the agreement was written up and presented to the neighbor. 

 I still have to drill a new well and do some exterior grading work and complete the inside repairs which I have an estimate of $2700.  All in I should be spending about $30,000 in the rehab.  I then divided off 50 acres and I have that on the market for $50,000 which is a good deal for the buyer based on location. 

I hope to be done and back on the market within 30 to 45 days.  I am figuring a sales price of $285,000 for a reasonably quick sale. Plus I have the $50,000 from the land divided off.  With holding costs and closing costs on both ends I should have approximately  $200,000 invested.  

 Hopefully there is enough information here that can help potential bidders at auctions not only on what you have to be aware of in terms of possible problems but also some creative ways to make more money on a flip.