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Six Tips For Buying Properties at Traditional Auctions
By Kevin Norton
Historically, it used to be the case that auction properties were normally found in the inner city. Due to the current downturn, we're now seeing suburbia being hit. This means that more properties across the state are going to auction, especially on the Cape where people bought second homes and can't afford to keep them.
Buying properties at auction isn't for the faint of heart. I've been doing it for 13 years, and I still have days when I find myself hesitating to pull the trigger on a deal.
Auctioned properties involve a great deal of risk because you don't have access to the property, you can't do a traditional appraisal, and you sometimes find out after the fact that the property needs the septic replaced to the tune of $25K, blowing your investment strategy to hell and eating away at your expected profits.
However, you can pick up some pretty good deals if you know what you're doing. Here are my tips for investing in auction properties.
* Next 37 17 investors only!
- Conduct thorough research - Because you can't do a traditional appraisal with auction properties, you need to do "shoe leather" research, starting with town hall. You'll want to visit the following departments:
- Assessor - Look for taxes owed on the property or if it's in Tax Title. Also ask for a MLC (municipal lien certificate), which states if any liens have been put on the property. (Some towns charge $25 for this document.)
- Building department - See if any code violations exist or if permits have been pulled on the property for prior work that was completed legally, properly inspected, and signed off.
- Health department - Again, ask about any violations (i.e. septic, termites, trash, lead paint, etc.).
Also visit the police department and ask about any violations or citations for family disputes or disturbances. If the property is a multi-family, this will give you a good idea about what kind of tenants live on the property.
Your last stop should be the property itself. Walk around and if you feel comfortable enough, knock on neighbors' doors. Many will come out and start talking to you. You'll get all kinds of information about the property and the current owners and/or tenants - "Oh yeah, the police were here every three weeks" or " I know for a fact they have termite damage, that the house has been vacant for some time, and that the pipes froze up over winter."
To keep things easy and to save drive and research time, I suggest you limit your focus to properties within a 20-mile radius of your targeted market area.
- Call before you go - Auctions are frequently cancelled or postponed at the last minute (due to the owners filing bankruptcy an hour before the auction), so it pays to call the auctioneer 15 minutes before the auction is scheduled to take place.
- Arrive at the auction five minutes early - Auctions can take place literally in a few minutes depending on who shows up. Experienced bidders will often tell the auctioneer to waive the legal readings - speeding up the process. I've arrived at auctions ten minutes late only to find the auction is over and done.
You should also note that auctions take place weekdays 9:00 AM to 5:00 PM, never on weekends.
- Know when to hold 'em - The biggest mistake rookie bidders make is placing a bid too early in the bidding process. To learn how the pros do it, spend a month or two attending auctions and watching the proceedings. Get to know veteran bidders and auctioneers.
Also note that experienced bidders usually wait until the bank representative makes a bid - often called the "strike price" - and then place a bid a few cents over it. Some auctioneers, however, will stipulate bid increments of $50, $100, or even $1,000. Others will let you bid only $1 more over the Bank's final price.
- Know when to run - When it comes to auctions, you need nerves of steel, especially since you have to train yourself to walk away from a $5K or $10K deposit. What usually happens is that the winning bidder will hear from the property owner after the fact that the property needs serious work or a new septic system.
Or, winning bidders get scared off by the owners - they'll learn that the present owners will be nothing but trouble - and will walk away from the property, leaving the deposit on the table.
In cases like this, you'll want to build a small network of investors who specialize in these types of situations. For example, I recently had a high bidder ask me if I wanted to take over his contract because he realized he couldn't finance the deal and started having second thoughts.
Most investors will sign the Contract and next to their name write in "and/or assigns," which legally allows them the option of assigning their bid to another party.
- Know your market - Another reason for keeping a tight target area is because knowing your market is key and every market is different. Get to know your market by reading the local newspaper, attending a few town hall meetings, and walking the neighborhood. Note which streets are being upgraded or how other streets may be impacted by the town's limited budget or lack of tax revenue. All of this information will help you determine value for auction properties.
Buying properties at auction is a fulltime job and it's not for people uncomfortable with risk. To be successful, test the waters first by attending auctions and watching the proceedings, getting to know the players, and finding the right market. You may decide that auctions aren't for you - or you'll become like many investors who enjoy the thrill of the hunt.
Kevin Norton is the VP of the REO division for Daniel J. Flynn and Co, a Quincy, MA real estate company that provides auction and real estate services. Kevin can be reached at 617-479-9000 x 115 or by email at knorton@djflynn.com.
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