A racing heart, sweaty palms, and sneaky looks if you’re lucky! (very long) - Posted by ray@lcorn
Posted by ray@lcorn on October 30, 1999 at 01:02:27:
Hi Dmitry,
I love auctions. I mean I really love auctions. There was a time in my life when I would go to auctions for the entertainment alone, and care less about what’s being sold. Car auctions are great training because you don’t have time to think. They’re rolling the car out the door while the bidding is still going… talk about creating a sense of urgency in the buyers! Real estate is a lot slower, but the money is a lot bigger too, and there is time for nerves to start dancing. That?s the rush I love.
There was also a time in my life that I haunted the auction circuit to make a living. I chased foreclosures in three counties, estate sales of real estate, tax sales, partition sales? whatever. When I was getting back on my feet as a real estate investor, I worked up enough cash to cover the 10% deposit by using cash advances on credit cards, profits from other deals, and whatever other cash I could lay my hands on, up to and including anybody else I could talk into getting a cash advance on THEIR credit cards. Around here, you have to have “good funds”, which means cash, cashier?s check?s or the equivalent at foreclosure auctions, but at other sales most auctioneers will take a check if it is a local bank. I never tried a credit card check? Ron had a good idea in calling the auctioneer and asking. That way you at least have the information beforehand. (My bet is that if an attorney is running the sale, you?ll have to have “good funds.” Most lawyers leave little to chance, and have no sense of humor!) I know most of the local auctioneers here personally, and I?ve been known to ask them to hold the check until after two o?clock on Monday at Saturday sales. You?d be surprised how easily they will agree once they know you, and even if they don?t if you come across like a professional. It never hurts to have a name of a local investor or bank to drop as a reference. Work on your network of contacts, they will all come into play in this game. Auctions are a very public environment, and word travels fast.
I always knew going in where the line for a real deal was. I crossed it a few times, and made a good deal out of what would have been a great deal at less money, but sometimes it just happens that you need a deal and are willing to hope the next one is a home run. I did my homework. That meant I had searched title, found comps in the neighborhood, and usually had more than just background on the lender if not the borrower too. If my research didn?t tell me that I could buy at least 40% below market, then I just didn?t buy. I?d go to the sale anyway to see who did, and to be seen by the usual crowd that was following the circuit the same way I was. It?s all about doing what Terry Vaughan says is the first rule of dealmaking, play only when you know you can win.
There is a lot of strategy to think through in buying at auctions. I just bought a single family house at auction a couple of months ago. I hadn?t been to a house sale in a number of years, and it was fun to revisit the arena. We own two apartment buildings on each side of this house, so some folks at the sale knew we would be logical buyers. This is a college town with 99% market occupancy, so you don?t let rental property slip through your fingers, and we sure didn?t want an owner occupant between two apartment buildings if we could help it. My brother and I toured the house a couple of weeks before the sale, and did our homework with the planning department about the zoning, got some comps, and checked the title. Funny thing? the auctioneer wasn?t at all versed on the zoning? it is notoriously tight in this town. We didn?t call back and let him know what we found out, either. We did mention the possibility of sponsoring a keg party in our apartments next door to the house the night before the sale! We figured with enough free beer we could get a couple hundred college kids to trash the place and really make any prospective buyers nervous about the neighborhood! Just kidding?. 
My brothers and I decided that the house was worth no more than $70,000 to us, but we figured it would bring somewhere above $80,000 if an owner occupant was in the bidding. The 40% discount rule wasn?t in effect for this property because of our adjoining properties. We needed to control this parcel, and what we found with the zoning was that we should be able to add a unit and have a duplex for the cost of the house plus the improvements.
The day of the sale I waited until they were reading the sale announcements before I got out of the car. I walked around the fringes of the crowd until I found a place to stand that was out of view of about half the crowd, but with a direct line of sight to the auctioneer. The bidding started and the auctioneer had to come down to about $25,000 before he caught a bid. That?s something that you may not be accustomed to if you haven?t been to many auctions. If it is a professional auctioneer, not an attorney doing a foreclosure, then the auctioneer will start his chant with a seemingly very high number, asking for a bid. The crowd will usually stay silent. He will drop that number as he chants, and keep dropping the number until he “catches” a bid, or someone cries out a bid. I have seen properties come to 10% of value before the bidding starts, but then watch closely, because the show is on. Here is where the strategy starts.
My preference is to not bid until everyone else is through. If in the process the bid goes past where I have set my limit, then I just don?t bid at that sale. I?m not there to bid, I?m there to buy. Others prefer to get in at the beginning, and stay in it for the whole sale. Often, the ones that get in at the first fall out rather quickly, then serious bidders will start picking each other off. As the bid rises, the pace of the sale invariably slows. In this particular sale, the bidding slowed to a crawl at $67,000. I was in the game. I had the eye of the auctioneer, and he knew I wanted the house. He didn?t know what we wanted to pay, but I knew he wouldn?t let the house sell without giving me the last shot at it. I waited for him to say “Going Once- Going Twice?” and with my eyes locked firmly with the auctioneer’s, and the slightest tip of my head, I hit it with a thousand dollar raise. The guy that had been holding the bid looked around at the crowd and had no idea where the bid had come from because I hadn?t been bidding when all the testosterone was flowing. He wanted it too though, and he didn?t wait too long before raising me a thousand. The bid was to me right at the number that we had said was the max we would pay, $70,000.
I knew in my gut that this would not be the bid that got it, but I thought I could judge what the other guy was thinking, and how far he would go, by how he responded to my next bid. At this point I had the choice of not bidding, cutting the raise amount, or staying with the same raise, $1,000, and putting the pressure back on him. At auctions, much can be learned about the other guys intentions by the speed of return bids, and the amount of a raise. By cutting a raise or waiting for a while to bid, it can give the impression that you may be at your limit, and his next bid may be his last, so the other bidder has to be sure he wants to own it at that price. On the other hand, hitting a bid fast and hard can leave the other guy with to little time to think, and he may get befuddled, or bolder, you never know. I have also raised the raise, that is if the bidding has progressed at thousand dollar raises, I might hit it with a two or three thousand dollar raise if it is within the limits of what I want to[pay.
I took the middle road. I raised his bid a thousand without hesitating for a moment. The auctioneer was back at him so fast he didn?t have time to get a breath. He didn?t get that little respite from the tension of an impending decision that a bid usually gives. He hesitated, waited some more, then finally raised the bid to $71,000. I struck again, quick, but with a $500 raise thinking that if I could throw him off balance then maybe he would quit out of fear that I would leave him stranded with the bid, and not at all sure he wanted to pay that much. It worked. He quit right there, and the auctioneer spelled out “S-O-L-D” one letter at a time, and it was all over. Yes, we paid a bit more than we intended, but I felt good about the morning?s work. We are at work now getting the second unit built as an attached dwelling. That will cost about $40,000, and the finished product will appraise for about $175,000. This is a killer market. It always pays to learn the zoning.
Also beware of “auction fright”. Anybody who has experienced it will tell you they never want it to happen again. It?s when in the midst of tremendous stimulation you become paralyzed with the inability to make a decision about a bid. I?ve had it happen once, and that was enough. I go in knowing where I am going, and keep a clear awareness of what is happening.
I?ve gone on long enough, but I have at least a ten more auction stories. What a blast.
Go for it!
ray
Of course my husband thinks I’m crazy