Auction Property - Why so low? What am I missing?

Question

I have an opportunity to bid (online) on a SFH.  Its my FIRST property and I'm really nervous.  I intend to flip it.

My question is how can the opening bid on this house be 4x LESS than the home is worth?  Also, with only about 12 hours left to bid, why are there no bidders?  Why am I, the novice, thinking this is such a good deal?  We went to the house and did a visual inspection as best we could without being able to get into the house.  So I have my estimated repairs.  There are no liens against the property per the city.  There are comparable sales within the last 90 days that support what the house is worth (as well as the assessor's information).  Sites like Zillow claim that what is owed on the property is more than the opening bid.  What am I missing?  Why would a bank make the opening bid so much less than what is supposedly owed (which would make this not a good deal)?

Erin N. · Answer

@Vanessa PetersI have successfully purchased 2 properties on auction sites.  One was on homesearch.com and one was on hubzu.com.  I have not purchased on auction.com, but I can tell you about my experience on the other 2 sites.  Both the sites I purchased property from were nearly identical in their process.  Also, both of the properties I purchased came with title insurance provided by the seller, so having to do a big investigation into the title was not necessary.

I'm really not certain what others are referring to about some of the issues they have had with auction sites.  Both on homesearch.com and hubzu.com,  if you have met the reserve price and are the winning bidder, it's binding on the seller.  They can't get out of it (unless you don't meet the terms outlined for the buyer, of course.)  Just like with Ebay, if you don't meet the reserve price, it's not a sale.  That's just basic auction process.

As far as shills and sketchy sellers, you have no control over that.  You also have no control over buyer's premiums and other requirements of the auction site or the seller.  You cannot negotiate any of these items, and you can't ask for any contingencies.  You have to evaluate the property, the fees, and the terms and decide if it's something you want to do.

For my first property, which is my current primary residence, I paid $380k which included the buyer's premium.  I put $75k renovation into it and it appraised 1 year ago for $721k.  I took that appraisal and got a $100k HELOC that I used to buy another property.

The second property I bought on auction is a duplex that I paid $153k for on hubzu.  I put $25k into renovations.  I'm refinancing it now, and the appraisal just came back at $245k. I rent that property out for $3100/mo.

My advice to you is to learn the auction process, thoroughly read and understand all the terms and conditions, and don't allow the opening bid price or the behavior of other bidders determine what price you would pay for the property.  On my second property, I would have gone as high as $180k, but I would have walked away if it went higher.

Learn how to analyze a deal to see if it will make money.  Figure out what cash on cash return is minimum for you to do a deal.  For me, I have to get 20% annual cash on cash return minimum.

Auctions are a great place to get a deal. The problem I see is that most people who dabble in auctions are looking for a steal, not a deal, and get disappointed.

Vanessa Peters · Answer

Thanks for the help Nick.  You win some, you lose some.  I hope to be able to follow this property and see what the winning bidder does with it.  It was a learning experience.

Vanessa Peters · Answer

Thanks for the advice, Erin.  I am still learning here.  I am sure I will find something and help the BP community with my experiences and lessons learned and make a little money to boot!

Nick L. · Answer

@Vanessa PetersSorry to hear that. Don't forget that the other bidders may be shills until the auction reaches the reserve price.

Sometimes the banks price the reserve way too high or way too low - you just have to keep trying until you hit a winner, and hope nobody else found the same one!

Vanessa Peters · Answer

You guys were so right.  Price shot up.  Now, it's out of my range and perhaps there is more profit in this house than I realized since I am not prepared to go as high as these people.  Oh well, there will be others.

Vanessa Peters · Answer

Well I am in Orleans Parish.  When I said City, I actually meant Parish.  Trying to take care of title now.  (My big newbie error.  Should have been first thing. I got excited about the thing - emotions in control.)

Nick L. · Answer

@Vanessa PetersThe opening bids on auction.com and similar sites are not valuations. They're just low teaser prices to bring people into the auction. The reserve price is the true minimum sales price but of course it's hidden. If the auction ends and the reserve price is not met, the property won't sell. (Occasionally you hear of sellers approaching the highest bidder to make a deal after the auction, but only if the bid was nearly at the reserve anyway.)

You also have to watch for shill bidding on those sites. The site will generate fake bids up until the reserve is hit. It's in the rules but still kind of shady if you ask me.

Have you run title? You mentioned checking the city for liens but deeds are normally held at the county level. Maybe it's different in Louisiana with the parish system.

Vanessa Peters · Answer

Thanks for responding.  I'm using auction.com.  Still no bids but we have about eight hours left.  I'll keep watch.  Thanks to you both!

If anyone wants to share horror stories, I'm open to hear those!!!

Gloria Mirza · Answer

I don't know which site you are looking at.  Hubzu.com is horrible, so avoid that.  If you're at auction.com the price will increase very rapidly towards the end auction time.  Bid late and bid low... I think that's how the saying goes :-)

Brent Coombs · Answer

@Vanessa Peters, if you want to play the auction game, you have to "raise your hand".

Unless stated otherwise, the Seller/Bank is not obliged to sell it to the highest Bidder, are they? They could be just gauging the level of interest? Live auctions I have attended put forward that ONLY the highest Bidder will be given the option to buy it after the auction if their reserve isn't met. Otherwise, it would be passed in. [Not legal or financial advice].

Then I have read other posts here on BP where they were the ONLY Bidder on the day, and got it for one dollar more than the far-too-low starting price!

Best advice, read the legal terms; keep your emotions out of it; don't bid higher than necessary!

Auction Property - Why so low? What am I missing?

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