Brad and I have seen hundreds of properties sold at auction. We have been to private seller auctions, sheriff’s auctions, and REO auctions. Frankly we have never had a lot of luck at auctions because we are almost always out bid.
Why are we out bid? Because we have learned to do our homework and establish exactly what we are willing to pay for the property before entering the bidding. Consequently, we almost never actually place a bid other than the opening bid.
It logically follows that if we are out bid, the winning participants paid too much for the property. At almost every auction we have attended, the property sells for more, often significantly more, than we were willing to pay.
Why would otherwise rational, by-the-numbers investors pay more for properties at auction than they otherwise might? That’s simple. Auctions work.
For the seller.
We have seen it time and again, buyers get caught up in the excitement of the moment and do things they would not do in a more thoughtful setting. The better auction houses create such a distracting and stressful environment that we have even seen people placing bids against themselves and not even realizing it.
Another reason investors might bid more for a property than they should is that they want to justify their time investment in researching the property. They may go in knowing exactly what they are willing to pay but don’t want to feel their homework was a waste of time by going home empty handed.
We used to spend hours driving around town researching Sheriff Sale properties only to see the banks bid up the price of the properties we were interested in and buy them back. It does not feel good to know we wasted a day or more preparing for an auction.
Irrational Investor Case Study
Back when Brad was working as a Realtor, he had an REO property listed at $14,900. After it had been listed for a year, the bank reduced the price to $7,900. When there were no offers for more than $5,000, the owners decided to auction the property off.
At the auction, two people got into a bidding war and the property ultimately sold for $9,000. In addition to the $9,000, they paid a buyer’s premium of $3,000 to the auctioneer company. In other words, they paid $12,000 for a property that didn’t sell for $7,900 on the open market.
What was even more amazing was that one of the bidders had previously made an offer of $5,000 for the property while it was listed with Brad, and steadfastly refused to go any higher. This same investor helped bid the house up at the auction to $8,000 ($11,000 with the buyer’s premium) before backing down.
This investor was somehow willing to pay $6,000 more for the exact same house at the auction than he was when it was listed for sale in the MLS.
We call this the ‘auction phenomenon’.
But wait, it gets better. Once people participate in an auction they often act like the property is now somehow tainted and refuse to buy the property at all regardless of how good a deal it is.
What is the lesson here?
1) An auction may be an effective way to wholesale a property.
2) Don’t be surprised if you find that even your best wholesale clients sometimes turn their noses up at a property they might otherwise jump at for no good reason.
Is there a solution?
Not really. There is no arguing with people who have made up their mind in a situation like this. However, you must keep your perspective; have faith in your numbers, and move on to the next buyer.
More Irrational Behavior
Often times you will come across investors you wish to wholesale properties to who will not trust you, or cannot stomach your making a profit on the wholesale. What you paid for the property is, or soon will be in the public record, so there is no use denying what you will or will not make on the transaction.
Obviously the buyer needs to be more concerned about his profit, not yours, but sometimes people are people.
Is there a solution?
Again, as with the ‘auction phenomenon’ there is no real solution so don’t dwell on it. Keep the following in mind however:
- Never feel guilty about making a profit on a house because you figured out how to buy it better than anyone else.
- Be completely transparent in your formulas and calculations.
- Detail your comparable sales and active listings.
- Show your profit.
- Show how much money you are leaving on the table and show them how to harvest that equity for themselves.
- To paraphrase Zig Ziegler, sometimes to get what you want you have to help other people get what they want.
What experience have you had with ‘irrational investors’? Have been an irrational investor yourself? Share you experiences with us at www.MyRealEstateLifeOnline.com.
Chris McAllister
