Trying not to get impatient with auctions....

[Tim Wittenborn]

Hey all,

Some history about us, my partner and I flipped a house that we bought as a HUD foreclosure. We profitted nearly 60k on this property and we are now sitting on roughly 110k in cash. Our goals were initially fix and flip, but after watching several bigger pockets podcasts, we both decided that the BRRR technique showed great promise. We are keeping our options open for whatever comes along.

We decided to start with auction properties, since here in the suburbs of Chicago it seems there is a huge shortage of ANY property selling for under market value, including REOs.  It took about 2 months to develop a system that works well:  Pulling auctions in our price range, comping out the ones that we think will work, driving to look at the properties, having a title company run title searches, etc.  Whittling 30 or so properties down to only a few.  We have been actively bidding on 1-3 properties a week for about 2 months now.

We have had a few close calls where i was only a thousand or a couple hundred dollars away from winning the property.  The properties we are interested in after due diligence always have a good amount of aggressive bidders.  All of this is good.  We know that we are doing the right things and bidding on the best properties.  My problem is that we are always outbid.  Sometimes it is a bull headed person that seems like they will bid up to ANY amount.  Sometimes it seems like it's a representative of a wholesaler who bids and wins several properties that day.  Sometimes it's an odd situation where 2 or 3 people take the property WAY outside of profitability range.  It's almost like the people outbidding us don't need to make a profit.  

I know I should not despair, but it's been nearly 5 months of paperwork since we sold our first house, and I'm getting antsy.  Any words of encouragement or advice is greatly appreciated.

Thanks BP!

Tim W

[Account Closed]

@Tim Wittenborn

At least in my area, unless you're completely in the game, you have no real chance of getting a really good deal at the auction unless you have some kind of edge. When I say "completely in the game," I mean that distressed property is your job and your life. I live in Pittsburgh, and Pennsylvania has a judicial foreclosure process. The auction is the nexus of all distressed property in my county. So my situation is the extreme, but much the same factors are in play everywhere.

You have three competitors to worry about at the auction: the stupid bidder, the wholesaler, and the investor-contractor. Of these three, the investor-contractor is the most dangerous. Thankfully, he's limited. He can't bid on EVERY property that comes along because his resources are limited. The reason he can always outbid you and everyone else is that his renovation costs are ALWAYS going to be lower than yours. He has multiple edges. He gets his materials far more cheaply. His crew makes peanuts off him compared to what your contractors will charge you. He has long-term relationships with his main specialized subs, and often reciprocal barter relationships. He knows the code enforcement people in the area he's bidding in. He can better evaluate the condition of the property. You know those really nice hot new splash fixtures most real estate investors have to spend lots of money on? Quite often, he gets them for free as one or another trial program to evaluate them for the manufacturer. And of course he installs them in his projects for peanuts.

Again and again, he can bid higher on a property than you can because he doesn't have the same expense structure. Stupid bidders who are willing to pay too much money for what they think is a good-looking property come, lose their shirts, and go, but the investor-contractor is a constant fixture at these auctions, an adversary who does not go away and just keeps showing up, ready to bid.

Even worse, the investor-contractor is a known quantity. When he starts bidding at a property, you'll notice that the regular wholesalers who frequent these auctions remain silent. There are all sorts of barter relationships going on in that room between veteran auction-goers. Why work against each other when you can work together? I do you a solid, you do me a solid. They know they simply can't beat out the investor-contractor and still make money on the deal because their numbers won't add up. Let the lion have his share once he makes his interest known. There's plenty left over.

Another poster has pointed out that flippers need to keep their crews running to make money. This is perfectly true. That's a good reason for an investor-contractor to spend a bit more money on a property than he otherwise would. But here's another scenario: maybe the property the investor-contractor is bidding on is right next to a property he's already working on. The two crews working on the houses can easily share members, materials, and tools. His renovation costs on the second property just tumbled another ten to fifteen percent as one project became two with multiple shared costs. That's an incredible edge.

So, let's say for some reason you take away the stupid bidders and the investor-contractors. You still have to get through the wholesalers. These are typically the most successful wholesalers in your area. They don't have quite the same money edge that the investor-contractor has, but they've spent many years studying their area and studying real estate, and they have established relationships with the investor-contractor, and they will pounce on every good-looking property they see, and they typically know large areas like the back of their hands. They do nothing all day but go look at properties off the auction list, run their own title searches, and line up investors.

So what's your edge? If you don't have one, you're not likely to beat the auction.