You’ve done your research (you’ve read THIS article), prepared for an auction, and maybe even attended a few to get a feel of the process and the competition. How can you set up for success when it comes time to put your money where your mouth is?
Let’s talk debt stack, bid strategy, and bidding with other people’s money…
What is it and how do I use this information to my benefit?
Separate your leads from you we call a “Full Debt Bid” and a “Specified Bid.” When an auction starts, the opening bid is one of the other. But what are they and how to do you determine which one you’re facing?
A “Full Debt Bid” is the same as and “Equity Deal.” The homeowner had equity in the house at the time of the foreclosure, so the opening bid covers the full debt. If the opening bid is $100,000, and you get it for $100,001, you own the property for $100,001.
A “Specified Bid” is an opening bid that does not met the reserve of the debt owed. If the opening bid is $100,000 but the reserve bid is $140,000, and you’re the only bidder at $100,001, you’re NOT going to own the property for $100,001.
How do you know if the opening bid is a “Full Debt Bid” or a “Specified Bid?” You pull out your property information and refer to the debt stack; the unpaid fees, interests, liens, etc. that are lingering with the house. If you’d like to see what a debt stack looks like on any given property, we will go in and pull that for you. They’re $2.50 a piece, which is a no-brainer option when we give you information about a property that could mean the difference between you finding a good deal or not.
Let’s take Auction.com for example. Their low opening bids advertised online are bogus. They entice you to come to the auction with a super low opening bid but have what’s called a “reserve credit bid.” The amount that the bank has to get. The underlying liens on the house will determine the real opening bid. These bids start low with the hope that the low bid will attract investors to come down and bid it up higher (which usually happens). But if there is underlying debt on a house, the property will go for a lot more than that low bid that enticed you to the sale.
Remember! Full Debt Bid means there is equity in the property, Specified Bid means there are hidden costs that will drive the purchase price higher.
Know the Living Situation Before You Bid
Know if the property is occupied or not.
We always bid higher and more aggressively on an empty property because I buy it, I own it. If a tenant is in the home, there could be a 30 day, 90 day, or even a 180 day eviction period before you can even access the property, not to mention the headaches and legal fees associated with assuring an empty property. Drive by the property before the auction to be sure.
“I thought I just placed a bid for the house I wanted until I win? You mean there’s more?”
Let’s say there’s a property I’m willing to bid aggressively on and everyone someone bids up a thousand, I increase the bid by 5k. This is called “Shocking the Bid.”
Let’s say it starts at 100,000 and I open the bid. Someone bids 101,000, so I then bid 105,000. Someone else bids 106,000, so I bump it to 110,000. Then 111,000 is the next bid, and I increase to 115,000. Now, why would I do that? Doesn’t it seem risky, like I would end up paying more than needed?
There are two ways to bid; spiking the bid and chilling the bid. When I bid in chunks of five-thousand dollars, I’m “spiking” the bid with the intention of shock anyone else who is bidding because they might not be ready for it and could back off their own bid.
Why is this an advantage? You are bidding against people who have the same set of numbers that you do (year build, current value, maintenance cost, repair/rehab cost, sales cost, and ARV). This is especially helpful when you know the bid will go a lot higher than the opening anyway (for our example of opening at 100k, let’s say you know it will go for at least 140k because it’s in good shape).
Then, there’s “chilling” the bid, where you bid in smaller increments of around $100.
Why chill the bid? You want to make sure you don’t pay more than you have to (you’re not aggressive, there are tenants, no one else seems particularly interested.)
No matter your strategy—whether spiking the bid or chilling it, you should still always stay within your maximum allowed offer (MAO), or max allowed bid in this case. When you win an auction, you are the person who was willing to work for the least because you can’t sell it for anymore than the person next to you and you can’t get the labor any cheaper than anyone else. So it boils down to who is willing to do the same amount of work for the least payoff, and you don’t want to bid so high that you don’t make a profit at all.
Bidding with My Money
How would you bid if the money wasn’t yours?
Most people just starting out at auction make decisions based on fear. Of course you do, it’s scary to spend so much money when you’ve never done it before. But what if you could bid with someone else’s money? How would that change the way you view the bidding process?
I believe it would, and I’m willing to bed my money on it…
The best advice I could give you about auctions is to not buy houses at them.
“Wait, Lee! You just taught us all about auctions and now you don’t want us to shop them?”
If I can avoid picking up a house at auction, I will and here’s why; if the owner has any equity in the property (Pop quiz! What’s this called when the house goes to auction?…a “Full Debt Bid”), then I will try to purchase that house direct from the owner.
If the opening bid is a full debt bid, then it’s an equity deal and I can go knock on their door before the auction and buy the property straight from the owner at that opening bid, making us both money. (For more on equity bids, CLICK HERE!)
Why? If I want to be the best person in the room, the easiest way to achieve that is by being the ONLY person in the room. If I can make the homeowner an offer before the property goes to auction, I can get the house without being bid up and the homeowner can make a profit they wouldn’t otherwise make by losing the house to foreclosure.
“But wait, Lee!” you say. “You didn’t say enough about bidding at auction with money that isn’t mine! How does that work?”
The last Lee’s Inner Circle is in September. The last one. If you want in, this is your last chance. As a bonus, at this event, we are going to set aside funds to help you buy at foreclosure auction. We’ve never done this for a group before, so why are we doing it now? Well, we want to test to see how successful you can be in your own market at auction when you aren’t concerned with the cash. If you’d like auction money to buy properties in your market, contact us to find out how you can have access to that privileged training. This is the first time we are doing this, but like I said, this is the LAST time I’m doing Lee’s Inner Circle and it’s filling up quick. If you’ve been considering it for a while, you’re down to your last opportunity, so don’t make the decision lightly. If you want to attend, I want to get you there. Call us to discuss your options (800) 747-1104.
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing