Getting Chilly at the Auction: BRRRRing My Way to FIRE Part 1

Part 1: B(RRRR)

My heart racing, I started to call out my bids: “29,000.” Across the room my foe called out his own, raising mine by $1000. “Thirty.” I replied back in kind “Thirty one.”

“Thirty two”

“Thirty three”

At this point we were well under my max bid and it was just me and one other auctioneer.

We continued to raise each other by thousand dollar increments until I called out “38,000.” By now the momentum was grabbing me, he seemed determined and I was ready to give in. In my head I knew 41,000 was my max. I thought “if he says 39,000, I’ll counter with my 41,000 and then get out of here.”

“39” I hear. My stomach dropped, I shook my head and called out “forty one thousand.”

No reply.

The clerk repeated my bid: “41,000?” Still no reply.

“Sold” and she slammed the gavel. I won.

Immediately I knew my emotions got the best of me and I probably could have had the deal for $40,000.

Lesson #1: Have a process; trust the process; stick to the process.

I walked up to the podium with my certified check for $5000 and started filling out paperwork to acquire my first auction deal.

The Numbers

As part of my real-estate-investor-in-training crash course, I had gone to the Sheriff’s sale a few times to see how the process worked, what the competition was like, and how an auction deal compared to prices on the MLS. Turns out the deals looked pretty good, and I could get something with my measly cash position of approximately $50,000.

Before each sale I would drive by 3-5 properties that I would be able to afford, inspect the exterior, then run comps on the neighborhood and figure out my ARV and market rents. When looking at the exterior I would look at the roof, siding, driveway, garage, and anything else that I knew would cost $5000+ to fix. Since I couldn’t inspect the interior, I had to assume the worst and save all my rehab capital for inside.

In calculating my ARV I assumed I would have to do a basic interior rehab for which I budgeted $10,000-12,000. I was purchasing 3 bed 1 bath houses, could do all the plumbing myself, and would also do painting, groutable vinyl flooring, and cabinets myself. Electrical, hardwoods, carpeting, and HVAC would get contracted out. On top of my estimate I put an additional $3,000-$5000 for unknowables, which brought my max projected rehab budget to $15,000-17,000.

Running the Numbers

As Brandon Turner and every BP Podcast guest has said ad infinitum, you must practice running your numbers and practice running the numbers I did. I was a teacher at the time, was off for the summer in 2016, so I went to the auction every Monday for 6 weeks. I had no money. I couldn’t bid. I definitely couldn’t buy a house.

So I sat there and watched as these other wealthier, smarter, richer, better, savvier investors came in and scooped up properties for $10,000 less than what I projected was a deal. Here comes a property that I thought was a screaming deal at $55,000. Here comes an investor who bids the starting price of $42,000, has nobody bid against him, and walks out with a 3/1 rental whose conservative ARV was $90,000.

For 6 weeks I ran the numbers and for 6 weeks I watched wealthier, smarter, richer, better, savvier investors walk out with literally hundreds of thousands of dollars of equity simply by being in the game. At this point I knew where I had to be, even though I wouldn’t be there for another two years.

Lesson #1B: Practice the process so when you are ready to execute, you are actually ready to execute.

Hey BiggerPockets, thanks for setting me up to fail

Back to the actual deal. As the next property was being bid on, I walked up to the clerk who would take down my information for the deed and said “do I get the keys from you guys or do I just go over there and figure out a way to get in?”

With boredom, disdain, and a casual matter of factness that only a member of a soulless bureaucracy can give, she told me, “don’t go in the property. Don’t knock on the door. Don’t disturb the tenants. You can’t do anything until the deed is in your name and that’ll take 45-60 days. If you decide to go on the property you’ll be cited for trespassing.”

In my head I was thinking, “HEY BIGGERPOCKETS, YOU NEVER TOLD ME I WOULD HAVE TO WAIT 60 DAYS TO START TURNING AROUND THE FORECLOSURE I JUST BOUGHT WHICH I HAD PLANNED TO FIX UP IN THE NEXT TWO WEEKS AND HAVE RENTED BY AUGUST 1ST!”

What I said was, “could you explain what you mean by ‘tenant?’ I thought the Sheriff already went over there and evicted any possible tenant which is why I was able to purchase this house at the auction.”

Long story short, the Sheriff posts an eviction notice but does not oversee and carry out an actual eviction of the person or persons who may be living there. Additionally, since there is some awkward purgatorial lag time between the initial foreclosure “eviction” and my taking possession 60 days later, some squatters could move in and I would have to evict them when the deed transfers to my name.

Lesson #2: 200 podcasts and a dozen books still don’t prepare you for the real thing. Or, plans are useless but planning is indispensable.

Luckily, during my “run the numbers” practices, I had bumped into an old high school buddy who had been buying auction houses for years, and he was at this auction. I talked to him and he told me what to do next:

1)Post a 3-day notice with your phone number on all the doors

2)don’t pay your remaining balance until the “confirmation of sale” occurs

3)call a lawyer and have everything in order in case you need to carry out eviction #2 on the squatter horde that will take up residence while the county takes 60 days to give you permission to enter the property you just bought at the auction. Angry face emoji.

Quick detour: Buying this auction property only made sense for me because it was July and I thought I could have it turned around by August 1 to be rented for the year. I’m a teacher so I use the summer to work on my rentals. This 60-day deed transfer nonsense put me into September when I would be 100% busy teaching and is also not the optimal time to be signing new tenants to a lease.

Despite being angry, I walked up to the recorder’s office, channeled my inner Dale Carnegie and went to work Winning Friends and Influencing People who could take up to 60 days to record my deed, but who could probably get it done in 30 if I wasn’t a jerk.

I cracked a few jokes about trying to bribe the office ladies and the lawyer who would be processing my information, got the office ladies’ first names and assured them how helpful they’d been, and made them assure me that if I tipped them for how helpful they’d been it would be considered a bribe and they’d be fired. I also made sure they knew my name and my property and would call in a week to see how they were doing.

So far, I had “bought” my first auction BRRRR and was ready to move from “B” to “RRRR”! Stay tuned.