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Buying an Investment Property on Auction.com

God help us if we ever take the theater out of the auction business or anything else. It would be an awfully boring world.
–Alfred Taubman<

I’ve been known to buy a thing or two at auctions. When I was in graduate school, I used to hang around the University of Virginia surplus auctions and buy random pieces of computer and scientific equipment, which I’d then resell on eBay, sometimes for handsome profits (thanks, Rhodes College, for buying the rodent breather!). I was a small player in those auctions. There were people who did thousands, if not tens of thousands of dollars worth of transactions during those monthly auctions, and many of them paid for their purchases with their eBay credit cards, so it was no mystery that they were doing the same thing I was, just on a grander scale.

What I bought and sold wasn’t enough to pay for my grad school education, but it certainly paid for beer money during those years. I never lost money (though make no promises that it can’t happen to you) when I purchased items at auction, even if I didn’t always sell everything. There were two extremely simple reasons why I was able to successfully create a surplus auction side gig:

  • I looked up the sales prices of the equipment on eBay, so I knew how much I could pay for an item and make a profit. The University of Virginia would publish an auction list a couple of weeks beforehand, so I could look up how much each item had recently gone for in an auction. I also goosed up the shipping charges to pay for my time packaging the items and taking it down to the post office to send away, so I was even compensated for my labor. I wasn’t compensated, though, for my wife’s complaints about a stockpile of inventory cluttering up the extra bedroom!
  • The difference in the number of buyers. In the University surplus auctions, there were, at most, 50 people taking part, and only about 20 of them were serious buyers. I rarely got into a bidding war, since I was the only one interested in old printers and random items. Most of them wanted computers or medical equipment, and each seemed to have his or her specialty. On eBay, though, there were thousands upon thousands of buyers. Since demand was higher, basic economics states that the price will be higher.

eBay Rating by Hull Financial Planning

I even tried my hand at a real estate auction, looking to buy tax deeds, but I had neither the time nor the patience to go through that auction, and, honestly, I attended that one out of curiosity. But, while I was there, I noticed a HUGE throng of people attending a concurrent foreclosure auction. I sauntered over to the edge of the ring of people on my way out and saw that it was run by a company called Auction.com.

When I got home, I pulled up the website.

Auction.com website by Hull Financial Planning

There are two primary ways to find information about properties that are up for auction. The first is to use their navigation system. The second is to sign up for e-mails about auctions. After trying to navigate around their system, I decided to sign up for the e-mails. This was primarily because there was no simple way for me to discern how to look for online only auctions in multiple counties; whereas, I could get e-mail alerts with links for the specific types of properties I was looking for.

I had previously been signed up with williamsauction.com to receive e-mail alerts, but their business seems to have dried up, and there are few properties that are available. The Williams auction model is mostly to sell individual homes at a physical auction location, with online bidders competing against bidders physically located at the house being auctioned off.

The auction.com model is to sell at foreclosure auctions, in person, and to sell other properties solely online.

I wanted to look for online only auctions for a couple of reasons:

  • The in-person auctions are crowded. It’s not that I don’t like people (I do!), but the fewer people competing against me for a property that I want, the better.
  • In-person auctions get more emotional. If you’ve ever been to an auction, wanted something, and then been outbid by that so-and-so over in the corner who…was that him SMIRKING at me?!? Why I oughta… then you know how it can become personal. Soon, you’re way past how much you really wanted to spend because you’re just trying to get at that $*#$&#%( over there in the corner to show him. You want to preen around and show that you have money too, you’re a sophisticated buyer, whatever. It’s an opportunity to show that you can keep up with the Joneses of the auction world, and it can be expensive to do so.
  • Fewer people bidding against you. I know this seems like I’m repeating #1, but auction.com is but one way that people find out about foreclosure auctions at the courthouse steps. Most jurisdictions are required to publish notices of pending foreclosure auctions to be held at the courthouse steps in the local paper at least twice, and usually thrice. That’s a lot of exposure and the opportunity for other people to come to bid on a property that you might want.

We had noticed a couple of properties in our area that would make good rental properties (great ones if the price was right) and tracked the online auctions to see how they proceeded. A couple of them went for surprisingly high prices, but most of them wound up selling in a reasonable investor range – prices I would have been OK paying for those properties.

Finally, a house came up for auction in a nearby town that our property manager had said we should acquire rental properties in if we could, because it had high rental demand, low supply, and could economically support the rents that would make a good return.

I signed up to bid on the property. To sign up to bid on a property on auction.com, you need to complete two steps:

  1. Sign up for an account.
  2. Register to bid on the property.

When you register to bid on the property, you need to provide them with a credit card number. They will put a $2,000 hold on your credit card. This is in case you’re a winning bidder and then back out of the purchase.

I also received a call from auction.com to verify that I’d registered and to go through a mini pre-qualification process. The woman on the phone wanted to confirm that I knew that it was an all cash auction and that the property was being sold where is as is, so there were no contingencies. I confirmed, and she approved me.

She also told me that if we were the high bid, we’d have 2 hours to electronically sign the contract and that we had to pay the earnest money deposit via wire on the next business day.

We were ready to bid.

The auction.com bid page itself updates automatically. It’s run in AJAX – computer speak which means that you don’t have to keep hitting refresh on your browser. So, when you bid, the page automatically updates to show if you’re the high bidder. There are minimum bid increments that decrease as the price goes up, but you’re allowed to bid more than the minimum increment if you want.

I opened the bidding. The opening bid was $10,000, which was not enough to meet the reserve price. The reserve price was the minimum amount that the seller was willing to accept to complete the auction. I’d seen a couple of properties close without meeting the minimum, and it looks like auction.com will re-auction them at least twice more attempting to get a higher bid.

Soon, I was outbid. I saw that I had been outbid because I happened to be on the page of the auction, and a few minutes later, I received an e-mail telling me that I had been outbid. Since the auction price was below what I was willing to pay for it, I bid again. We went back and forth, and the bid increment decreased.

I then had what I thought was a brilliant idea. I noticed that the bidder(s) against whom I was competing were slow to react to my bids. I’d bid and it’d be between an hour and 24 hours before they would outbid me. I thought that they might be using the e-mail system rather than watching the page. I knew that auction.com would add a couple of minutes to the closing time if there was a last second bid, but I also figured that the other bidder(s) were using e-mail as a notification, and the e-mail wouldn’t go out until after the auction closed if I waited until the last minute to bid.

Outbid by Hull Financial Planning

It was the Saturday after July 4, and we were on vacation. I was sitting on my computer at our bed and breakfast with sweaty palms, hoping that the Internet connection stayed up, because we were staying in the middle of nowhere, and I wouldn’t be able to find another connection in time if our wifi went out.

I put in the bid. I made it a manual bid and made it a few dollars over the increment in case someone else tried to put in an equal bid; mine would be higher. I got the notification that I was the high bid and auction.com added two LONG minutes to the clock.

High Bid by Hull Financial Planning

The minutes ticked ever so slowly away, and then I received confirmation that we’d won the auction.

After Sale by Hull Financial Planning

A couple of minutes after the auction closed, I received an e-mail verifying that we’d won the auction and asking me to call the auction.com hotline. I called, waited on hold a few minutes, and then was routed to the closing department. The closing department didn’t answer, and the woman said they’d call back.

We waited a little while longer, but by now, my wife was itching to go out. We were, after all, on vacation. The problem was that we were out in the hill country of Texas, where cell phone and 3G reception was spotty. We went into town and got lunch, and after an hour of waiting, I called back to confirm that the contracts team was going to call. The woman who answered the phone said that they had between 300 and 400 auctions closing at the same time, but she’d walk it over to a contracts specialist to get him to call us immediately, since I didn’t know if we’d be in cell phone range. Good to her word, we got another call back in a few minutes, and the guy said that it’d be an hour or so before they could get the contract to us and our signature clock wouldn’t start until they sent it.

With a 3 hour window, we headed out to a winery. After we did the tasting and were sitting out enjoying a glass, the contract came in.

Becker Winery by Hull Financial Planning

I signed using my iPhone and then the contract was routed to my wife, who did the same thing at the brewery that we went to next.

Fredericksburg Brewery by Hull Financial Planning

According to the contract, we needed to send in an earnest money deposit of the greater of $2,500 or 5% of the auction price. When I was on the phone with the contracts representative, I asked if I could simply wire the entire amount and accelerate the closing. He said that would be fine.

So, on the Monday afterwards, I initiated the wire transfers to complete the purchase. I didn’t have all of the money in one account, so I had to send wires from two banks.

Apparently, this confuses auction.com people. We received several calls asking about the deposit, even though we’d already wired the money and sent e-mail confirmations of the wires.

Jason,
I am little confused by the wire amount; why $Y? The require EMD amount is $X [editor’s note: an amount far less than $Y], and this is far short of the total purchase price, so I want to ensure that this is not a typo. I need to verify what I process will match what the closing company is going to receive, or the closing company will kick back the wire. Please let me know A.S.A.P.

Best regards,
[Bob]
Contract Specialist

Finally, after multiple unnecessary phone calls wasting my time as well as auction.com’s time, they finally realized that we’d paid in full.

It was now in the hands of the title company. The title company wasn’t ready the day after we’d wired the funds to complete the contract – not necessarily surprising.

In properties bought and sold through auction.com, the seller has 15 business days to actually accept the price. The bank that owned this property took all 15 days before they approved the sale. I was surprised since, a) my bid was above the reserve price, and b) I had already wired the full payment amount.

It then took the closing company another two weeks before they were able to complete the closing. I was traveling, so I informed them that I couldn’t close during the week I was out of town. I told them I could close on the Monday that I returned. On the Monday when I was out of town, they e-mailed me the closing documents. I printed them and we signed and initialed at all of the required places and sent an overnight FedEx to the closing company. They received it on Wednesday and informed me on the Friday that they’d closed.

This was very inconvenient, as I was out of town and had set up my insurance for the next Monday. I had to scramble to get the coverage moved up and to ask my property manager to go get the keys to the property, which the selling agent had left under a rock by the front door. But, I got through those issues without any major hiccups and we’re now the owners of another rental property.

So, the process wasn’t without hiccups, but it wasn’t much worse than anything I’ve experienced in purchasing property the traditional way. I think we got a good deal on the property, so I’d do it again, process hiccups notwithstanding.

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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