Indicators of bank reserve value for auction?

Question

Hi all,

I'm attempting to be as strategic as possible in establishing my target (not maximum) purchase price offer for a property.  I believe I want it to And I'm looking for whatever I can find to tease out how high the seller's reserve price is.  Any suggestions on how to clue in on the bank's reserve price would be welcome.  I know I won't find a hard rule and that it "depends" on many many variabes, but I'm looking for "clues".

CLUE 1) STARTING BID(YES?) In looking at multiple REO's currently under auction (at Auction.com) in the same zip code, they have respective starting minimum bids of $15k, $20k, $40k, and $60k.  This is ~15% of appraised value (for the $15k, $20k, and $40k properties) and ~30% for the $60k property (which is ironically $100k lower appraised value and the 2nd most highly valued behind the $40k min bid property).  So I'm wondering if they have a lower reserve for the first 3 (at 15%) than the 4th (at 30%) even though one of the first three has a higher appraised value.

CLUE 2) COMPS (YES?): Nearby comparables on $/gsf basis.  Yes, probably, but at what multiple since it's going to auction...  70% recovery factor, 80%, 90%?

CLUE 3) LIEN VALUE (NO?): Mortgage on which the bank foreclosed originally.  Once the borrower defaults and the property goes REO, I'd expect the bank just writes-off the mortgage value and writes-in the current appraised market value (the delta is them truing up their financial position for stockholders).  Certainly they aren't likely to get the full value all back if the property was so underwater that a shortsale path wasn't taken.

CLUE 4) AUCTION ROUND(YES?).  Do they drop the reserve ~10% for each Auction round that the reserve isn't met.  i.e. ~90% for the first attempt, ~80% for the second, etc.

CLUE 5) RULE OF THUMB (N0?). Is there a RoT used in the industry that roughly covers all of the above?

Any other suggestions or links to other forum threads?

Thanks,Cole

Mark Elliott · Answer

excellent advice from all. in my personal experience, i have never found a way to determine the reserve price at all. however, i have on 2 occassions had the bank lower their reserve price after my high bid did not meet their reserve price. it is quite true that they will counter your offer with a lower offer, trying to get you to pay a little more. both times, i accepted their offer so i cannot say what would have happened had i not accepted their offer. would they have come down more? would they have accepted my offer or maybe threw it back on the auction? who knows? but i do believe that they will counter with a lower offer should you be the one with the high bid that doesn't meet their reserve. after all, do they really want to hold onto this place for a while longer after they have been dealing with it for years already? probably not.

Joshua Houchins · Answer

everyone here has answered your question exactly right with good advice.  One thought on your auction purchases.  Most auctions in person or online in my area are being purchased by large investors and are getting close to 90-95% of the property value which is hard to compete with.  So a lot of auctions are holding out for really high bids.  I recommend finding estate sales I seem to be getting better deal on this sort of sale versus auctions in my area.  Good luck.

Al Mcbee · Answer

So, although a property is scheduled for auction, I can still try to buy this through the listing agent before the start of the auction?

Or roll the dice at the auction?

Rocky V. · Answer

Are you purchasing at Trustee Sale or online?  I've purchased from both and all responses are correct in that there is no way of telling what the banks reserve will be at.  I would follow some properties that are currently available and see where max bid goes.

Kevin Page · Answer

They won't share the BPO but you might be able to get some info from the listing agent, if there is one. Also you might have the high bid but the bid did not meet the reserve. They will call you and make a counter and try to get you to pay more. If you don't raise your price then they might accept your offer or they will put it back in the next auction. One thing I know working with REO's is there are no rules and they don't care.

Check out some other posts for investors working the auctions for more insight.

Stephen Roberts · Answer

Regarding the reserve, there must be some rational structure behind it (not just personal choice by lender).  Anyone else have a suggestion from your experience?  I believe they are obligated to accept my offer if I hit their reserve, so I believe I want to come close, but not go very far over.

Stephen Roberts · Answer

Thanks for the thoughtful response Kevin,

And will they share that BPO (Broker's Price Opinion) in any way or is that kept behind the veil also?

Kevin Page · Answer

I don't think you can figure out the reserve. There is no formula they use.  I have listed and sold REO's through MLS and auction and the only value we have is the BPO. We never get any idea of the reserve. What they usually do is get a BPO from the listing agent, another agent and even sometimes an appraisal. I have seen the property sit on the auction and not sell and go back 2-3 times or change agents. If you submit your offer at the right time you can get a deal. I would concentrate more on determining a value and submitting your offer. Sooner or later you will get a deal. In many ways the banks are just like regular sellers. They want to get the best price.