Auctions and Value - Things Aren't What They Seem
Posted by Ryan Ward on Monday, October 26th, 2009 at 9:06am.
Sold to the lady in the back for $435,000! What a deal! The screen says the previous value for this home was over $1,000,000. I've found it at last! Now I know exactly where to send every person who calls looking for that great deal. The auction!
If you're in the business and you get leads online, you definitely know the guy. Most others in the business know this guy now too. It's just a product of the current conditions. He acts like he knows more than you about real estate and before the phone call is over, he has made you feel like it's true. We get one almost daily, but the problem is, that guy doesn't have a clue about what he is talking about. If you are that guy, I suggest you re-read this paragraph.
I attended an auction this past Saturday with a friend/client as an exploratory event as a possible place to pick up homes that are in need of small repairs that can be flipped. My job is consultant here. The commission checks are small from auctions, but, it's more important to me that he buys the right houses at the right prices otherwise there is no chance to flip so it's a win/win partnership if I find the right houses. As this was a bit exploratory for both of us, I decided to pick a few houses to really watch closely at auction for a number of reasons. I wanted to know what the real "previous value" was, I wanted to know what they would sell for at auction and I figured the after repair value prior to getting there so I was ready to see how this unfolded.
The Auction
First, I need to say that it was quite a rush. I'd do it again. I think I will actually. The truth though, is considerably different than most people I have spoken with think it is as it relates to values and auctions. Of the homes I watched, none sold for the price I believed they needed to be purchased for anyone other than an owner occupied home. In other words, they sell for fair market value. Some for more than market value, but, that too is to be expected as the auctioneer is awesome! There are other homes - like those that might be in new construction neighborhoods that decimate value fro the entire neighborhood instantly. I watched as 6 houses were sold for between 80K - 90K where the values were in the 150's. Now, the 80K home isn't even a "deal". That's what the whole neighborhood is worth! Look, if you don't know values going in and you rely on the information on the screen you are going to get burned and speaking of that information on the screen, it's hardly accurate. I don't know where it came from, but, most of these homes have histories that I can look up in 30 seconds to determine and let me tell you what was on screen and what the real "previous values" were did not match. It made these homes look to be much better deals than they really were. I saw a home that I said should sell for no more than 425K sell for 412K, but, the "previous value" was wrong (over 800K, it was never woth that). Later I saw something that they said was over one million dollars sell for a little over 400. It was listed in the 500's in the FMLS and didn't sell. Where is the great deal there? This is what happened over and over and at all different price points. "Previous value" of 115K, starting bids at 500 dollars, listed in the FMLS for $17,000 and selling for $10,000. Do you think that is a good deal? I could go on...
I watched for a few hours and was amazed at how free markets correct themselves so efficiently if allowed to do so. But, it occurred to me also that the deals really aren't that great - at least not on the whole and that makes them no different than regular listings for sale (unless you are the bank because they do liquidate properties). There are good deals and there are not so good deals. The problem with getting a good deal at an auction is as follows:
You have a room full of ready, willing and able buyers offering multiple offers on properties. None of that is what you want when you are in the market for a "deal."
So, the takeaway goes something like this...most of the homes for sale at auction were already for sale. Some have histories that go back years now so we know a lot about these homes. Most of them sell for what they would sell for in a fair market sale. These are the homes that were listed too high to sell or did not have good enough marketing to illicit an offer that might have been acceptable to the bank. None of these homes made exceptional deals and most importantly....
Nobody bought a home for 40 cents on the dollar!
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Ryan Ward, Principal
Premier Atlanta Real Estate
Phone: 404.630.3187
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Share12 Responses to "Auctions and Value - Things Aren't What They Seem"
"free markets correct themselves so efficiently if allowed to do so" best line of the article Ryan. The rest is easily summed up as "if it is too good to be true, then it probably is." I make my living at the foreclosure auctions and there are deals to be had, but you have to know your stuff or you will get taken for a ride. That these guys can state a house is worth so much more than it actually is should be policed. It is beyond puffery and they should be held liable for such statements. Now if GREC would just hound them like they do us...
Posted on Tuesday, October 27th, 2009 at 10:21 AM.
Nice article.....I am always tempted to go to auctions after reading a brochure or seeing an advertisement. I think the old adage "if it sounds to good to be true it probably is", applies here.
Posted on Friday, October 30th, 2009 at 1:52 PM.
The only person who makes out well almost always at an auction is the auction company. As far as the 6 homes that sold for 80-90k in a 150k area this is a great informational piece on why to buy in an established area. Sub divisions are great...but if the builder gets in trouble and needs to unload some houses quickly you can see you equity go from 20% to -20% as quick as Sold...sold...sold said the auctioneer.
Posted on Thursday, November 5th, 2009 at 12:42 PM.
This is a great article, over here in the UK the auction houses tend to put a really low guide price on the auction, well below what they expect a property to sell for, this in turn gets the room full with people bidding against each other, I've yet to see a property go for anywhere near its guide price in the last year.
Posted on Friday, November 6th, 2009 at 6:25 AM.
There are some "deals" out there but not in residential. The Silverdome in Detroit sold for half a million a few days ago: http://www.detnews.com/article/20091117/METRO/911170327/1411/METRO02/Silverdome-sale-price-disappoints. I wish I could have bid and just sold the seats. 80,000 x $200 each...pretty tidy profit on a half million investment. How's that for flipping? :-)
Posted on Wednesday, November 18th, 2009 at 11:36 AM.
I agree with your views Ryan. It is obvious that "most of the homes for sale at auction were already for sale".Things are really not that cool as we see or hear. Nice sharing of good resources and keep posting.
Posted on Saturday, November 21st, 2009 at 12:01 AM.
Absolutely Correct, there are many bidders with few seeing profits and happy sunsets at the end of the day. I am an investor from FL. whose family was investing before James Dean was old enough to drive. Auctions are fabulous we have attended thousands over decades but not all clumps of coal turn into diamonds. We purchased a very nice foreclosure auction home in I guess 2000 that was indeed a fabulous deal but upon taking possession of the house and having the utilities turned on we went over there for the big clean out only to find water, water everywhere on the back side of the house. Having municipal water, we turned it off at the meter and low and behold the coulprit was a busted waterline under the concrete foundation. What a mess, we had to tear up the flooring, rent a jack hammer and remove parts of the cement foundation to locate the source of the leak. Once located it was easy enough to replace the damaged pipe but replacing the foundation with wheel barrows of cement running through the house is never a clean thing to do. So we had a house full of damaged walls, damaged flooring and aggrivation but by doing the fix and susequent replacements ourselves we still made a small profit. If we had hired a contractor to do this we were told it would have cost $35,000 for locating and repairing the leak, the relacement of flooring, partial walls, foundation and the expense of disposing of the old foundation pieces. So What, you say. The real point is pay attention, the relative who speced the house for the family had missed a valueable clue. The ground outside that side of the house was washed away from the foundation and created a sort of gully, which was easily noticed. It was late in the day when he went by and looked at it, and it almost cost us money on that property. Learn to invest before you invest.
Posted on Saturday, November 21st, 2009 at 10:57 AM.
Another great article...home auctions is a innovative and effective way of selling home for the sellers. For the home buyers a smart move for an investments as the as properties are usually purchased at fair market value through competitive bidding.
Posted on Tuesday, November 24th, 2009 at 10:50 AM.
i was in the early stages of expanding our company. I loved your article but had a question about getting a good deal on an office space in Atlanta. I tried loopnet and i've been working with http://www.officespaceheaven.com/atlanta.html - any advice ? thanks
Posted on Thursday, December 10th, 2009 at 12:30 PM.
Ryan, I've been apart of many of these type of auctions and I really think you hit the nail on the head. If you can get enough ready willing and able buyers to an auction your not going to find that REAL deal that your flip investor type clients really need to make it a win/win. Its more important than ever to educate people about what a Real Estate Professional can really do for you and that's analyzing market conditions and properties. Great article!
Posted on Sunday, December 13th, 2009 at 7:28 PM.
You do make some great points here. While I have found a few good deals at auction, this was when the economy was in better shape. Now, like you said, most of the houses at auction are all the leftover overpriced homes.
Posted on Sunday, December 13th, 2009 at 11:56 PM.
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[...]real estate posts of the day for 10/26/2009 by Dean Ouellette on October 26, 2009 1) Auctions and value – Things aren’t what they seem – This post is dead on, sure some people may walk out of an auction with a great deal, but that[...]
Posted on Monday, October 26th, 2009 at 9:58 AM.