If you’re a control freak, it can be difficult to let the free market make the decision on what your “magnificent” rehab is really worth in a five-minute period of time. As a control freak myself, it took several auctions using our own inventory to realize sometimes the market said our property was worth more than I thought and sometimes less. When the market told me it was worth less than I hoped, it usually translated into either paying too much when we bought or spending too much to fix…or both…OUCH!
When we conduct our “California” reserve-style auctions, we feel it’s best to let the bidders provide the opening bid or start real low and then move quickly to the high bid using large bid increments. Using the traditional listing approach, on the other hand, many times properties are listed at 5-, 10-, or 20% more than similar, comparable sales in the hope that a buyer will pay more than value. When buyers don’t bite, the price is reduced slowly until a taker is found or the listing becomes stale and undesirable.
If an inflated FHA offer does surface, a rude awakening occurs when the appraisal(s) come in less than the proposed price offering. The buyer knows he is protected by the appraisal and knows the seller wants (needs) to sell…advantage to buyer. Because most FHA buyers also don’t have extra money to make up the difference from what they offered and what the appraiser said the property was worth, either the seller reduces the price or gives back the “contingent” deposit money. Bottom line: wasted time, additional holding costs, and more stress for the seller.
Other “net price” reducing costs include: the 3-4% closing costs many FHA buyers require, termite work, and/or home inspection-generated repairs.
When we sell by auction to an FHA buyer, it’s quite different. First — to be a bidder at our auctions, the buyer needs to bring a minimum of $5,000 in the form of a cashier’s check. Second — if they are the winning bidder, their non-refundable $5,000 deposit is held in our trust account per the auction contract they sign. Third — if the appraiser says it’s worth less than they bid, they lose their $5,000 at the seller’s discretion. In reality, however, because there is a lot of real money at stake, they usually find a way to close. Tougher rules makes more people do the right thing (like what my parents kept preaching to my brother and me) Fourth). Fourth — the seller doesn’t pay for the buyer’s closing costs, termite work, and home inspection repair requests. Fifth — the buyer pays for title insurance (which is normally a seller’s expense).
These auction advantages gives the seller about a 5% “net price” advantage compared to a traditional list-and-sell transaction.
We really don’t want FHA buyers at our auctions because we don’t want to be in a position to decide how much of their deposit to put in our bank account when their most generous relative won’t make up the appraiser’s short fall. Also, most FHA buyers don’t attend our auctions because they don’t have extra money, can’t afford to lose their deposit, and they need the seller to pay for most or all their costs. SO… most of our rehabs in Bakersfield aren’t sold by auction because the price range we buy, rehab, and flip is FHA buyer territory. We sacrifice net price and hassle factor because of the market we have decided to play.
The best properties to sell through us by auction are properties where at least 60% of the potential buyers are those who pay cash or have a real down payment and utilize conventional financing. In Bakersfield, its houses are valued at 50% above median price (about $225,000 and above). We also have witnessed unfixed properties (wholesale flips) and multiple units work very well with our auction service in any price range.
Recently, we sold a rehab in the L.A. area (Highland Park) that involved $100,000 in rehab, and fit the guideline of 50% above median price value, so we sold it using our onsite auction method. Ten bidders showed up, all with $15,000 cashier checks. The house closed on time with the buyer using conventional financing at a price $20,000 more than we had anticipated.
In Riverside, we wholesaled a house for an investor where the auction turned into a bidding war with 37 bidders. The price went through the roof (retail) and it closed with a cash buyer.
We sold a six-plex for a seasoned investor in southern California who wanted to reduce his management responsibilities. We had nine bidders, each of whom was required to bring a $50,000 cashier’s check. The property appraised for $150,000 less than the buyer agreed to pay — it closed because the buyer didn’t want to lose his $50,000 non-refundable deposit.
Elite Auctions specializes in assisting flippers and investors to sell their properties using an onsite auction with an experienced auctioneer and ringmen. We have revamped the cost to use our services, making it much easier to participate. Sellers are not obligated to accept the high bid (unlike an absolute auction), however, we won’t waste the effort if a seller is unrealistic with his or her price expectations. Buyers can bid live at the property, online, or by phone.
Now you know more about a great alternative to sell your property. Please feel free to contact me for additional information. Thank you.