Bidding on a White Elephant

Random Ramblings
1

I have been looking at foreclosure listings, For-sale-by Owner houses, etc. with the idea of getting something to re-sell, not fix up.

Near me a large house is about to be put up for auction, but it would be a money-pit.

Pros:
Nice middle-class neighborhood, no neighborhood problems.
Swimming pool.
3000+ sq. feet.
Good, newer roof.
Street appeal.
2 heating/cooling systems.
2 hot water heaters.

Cons:
5 bedroom, 4 bath.
Neighbors too close.
No garage.
Swimming Pool.
Needs all new windows–$10,000+?
“As-is”-- No utilities on.
Bad floor plan.
Needs paint in and out.
Probable monster heating/cooling bills.

I was trying to think at what price it would be attractive. It is listed at $189,000. I can’t see bidding more than $30-$40,000 and then immediately re-listing it on the market without doing any work except maybe a little cosmetic.

Anybody here know how to tame an elephant? Any comments?

Furnishedowner

2

The way you’ve described it, the cons are really cons. Out of the sweet spot for most buyers, except this is a neighborhood of similar houses.

We don’t know the ARV.

What’s the total (your realistic figure) to rehab the house?

What the total (retail figure) to rehab the house?

Normally, since everyone in their dog will know what you’ve paid, and won’t think to let you make a profit, you would do “something” to the house, to fog up the value, so that some amount of perceived increase in value is justifiable.

I took a dump (that is I bought a neglected house for cheap) and cosmetically dressed it up (covered all sorts of sins of that neglect), sold it literally as a “fixed up steal” to another investor and I made $68k in three weeks after the work was finished.

The investor appreciated the fact that I made the place rental ready, and the fact that I sold it to him for a quasi-wholesale price, too.

BTW, I listed every possible defect, real and imaginary on this house, so that he coudn’t come back to me and claim some kind of fraud. There had been a lot wrong, but some paint and carpet made it habitable.

I’ve got a couple of investors that give the bank close to their asking price and then beat them to a bloody pulp with their due diligence, until they get the price they really need. This both controls the property for negotiation purposes, and keeps it out of the hands of competitors, and finally allows for a profitable transaction.

Does that help?

3

What does “beat them to a pulp with their due diligence” mean? How does that get the price down?

Furnishedowner

4

That means find every problem possible and knock down the offer accordingly based on repair costs.

5

Yes, that’s what “beating them to a bloody pulp” means! Thank you…!

:biggrin

6

So they make an offer “close to the asking price” but subject to inspections and then drive down the bank’s price by listing the repair costs needed?

How will this work with a foreclosure, an “as is” sale, when none of the utilities are even on?

What am I missing?

Furnishedowner

7

It’s not a matter of getting the utilities “on.” It’s a matter of doing one’s due diligence about the structure, defects, termites, foundation, roof, mechanical, etc.

The professional investors do not have time to inspect houses they are making offers on until the banks accepts an offer. Investors might make 100 offers before they get an accepted deal. If the bank accepts their offer, then it’s time to look at it, and the negotiations begin.

Some banks require the buyer to sign off on the house and claim they’ve seen it and done their due diligence before the offer is made. That’s not enforceable. This is their attempt to weed out the true negotiators, since the bank is SO bad at it.

However, making cash offers with no contingencies, at the price you actually need to make money…bypasses the “satisfaction in negotiations quotient” (my term), that will necessarily make sure you never get an offer accepted that is profitable.

Banks need to work for a deal, just like you do. Without the “work” part, there’ll be a deal in a parallel universe, but not yours.

Meantime, you’re competing with amateurs who’ll overpay. So, to play the game, you offer the “amateur” price," and after acceptance of the offer, then you start negotiating. Also, you’ve eliminated the amateur from competition on the deal itself.

Banks are operated by functionaries who get bonuses for being “good boys and girls,” not because they’re good negotiators. So focus on the negotiations after getting an offer accepted, and then drill down on the price. That’s what I meant to say earlier…in not so many words.

Of course, every bank negotiates a little differently, but the common denominator is that the bank first wants to know you can perform, and that if they come to an agreement, there will be a closing. So prove you can perform, then move in for the kill.

---------------------- added
That all said, getting in touch with the gatekeepers at smaller banks is a better approach. They know what the bank will do, can negotiate fantastic terms in some cases, or otherwise, if they like you, and they know you’re not wasting their time, will make you rich.

The way I described at the top, is what you have to do if you can’t get to know the ones that make and shake things at the banks… FWIW

8

Thanks, Javipa, for all your advice. I have bought directly from a small bank before, so I know how that works.

But I have never bought a house at an auction.

At an auction, you can’t really go back and negotiate, can you? You have to make that bottom-line bid and hope that the entire heating and cooling system doesn’t have to be replaced in the house you bid on.

The idea would be to re-sell the property to an end user who would get new financing. So the property would have to have working heat and electric.

New area for me, so I am asking questions.

Furnishedowner

9

What you are looking to do is use the Greater fool theory. It is not much more than gambling. From Wikipedia “The greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to “a greater fool”; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price.

That is like asking should you raise on a particular poker hand of fold. It depends on if you feel lucky or not.

As I say about auctions. They are designed to get you to pay as much as possible for what is for sale. They are not designed to get you a deal and mostly never do.

10

You hadn’t mentioned the auction thing before. That’s a different animal than buying REOs straight from the bank, or through and agent.

Auctions are dangerous and stupid for those of us who don’t know who the players are; don’t know the farm; and/or don’t know the property.

Shills work ALL auctions. That is, you’ll be bidding against the seller’s plants. You must know who these people are, so that you don’t get caught up in the deliberate “frenzy” the auctioneers are paid to create and over bid.

Meantime, again, auctions are notorious for “seeding” the bidder pool with shills. Nonetheless, unless you patiently study each auction company, their staff, the site itself (regardless of location), witness, note and record who’s buying what, when, and for how much, and what properties/items are coming BACK on the market after being “sold” once (or twice), and have set limits on what you’ll pay, considering that you will NOT have access to the houses, or be able to check utilities, defects, etc., etc., you are playing a dangerous game.

There is a big auction player out here in southern California, that works the courthouse steps regularly. Unsophisticated bidders get bankrupted every time by this guy and his cronies.

After you’ve attended an auction and familiarized yourself with the players, their partners, bidding patterns, and properties, then you can begin to play this game safely. However, be aware of “new” players at these auctions. In the worst cases, shills trade off or migrate. You shouldn’t be surprised to discover the auction company, the auctioneers themselves, shilling for sellers, too. Look for imaginary bidders at these auctions. These are bidders the auctioneer seems to acknowledge during the bidding, but doesn’t actually exist.

Closed bid auctions are safer to participate in. However, it comes back to one’s familiarity with the market, and setting limits.

I think establishing a farm and knowing the market values and demographics is a main key in making money safely and reliably with auctions, especially when that includes wading into shark-invested auctions.

I’m not overstating the risk of auctions. Frankly, it’s hard ball, and you have to be more prepared than with about any other buying approach.

11

I’m not looking to buy on the courtyard steps. I agree, that is an area for experts and I am not.

The Realtor marketing (well, not marketing, but there is a sign in the yard) told me that the house will probably go to auction. It is currently listed at somewhere around $175,000 and is actually 2 doors down the street from me.

The one auction I attended here, at 8 AM on a Sunday morning, was done by an out-of-town auction company. There were only 5 bidders, 3 on-line and 2 in the yard of the sale house. That house went for $52,000 or so. Was listed at $167,000.

That house was more standard than this large white-elephant house. There might not be many bidders. So was thinking of a good low bid, put 5K back into the house on cosmetics, and sell it to an end buyer who would reside there.

That was why the topic was “Bidding on a White Elephant”. I think I could make it lendable for a few thousand, IF the heating cooling systems are okay. My plumber thought they looked okay, but who knows.

So not necessarily the “bigger fool” theory as far as resale goes, but getting it so cheaply that there is room for profit. I am thinking out loud here, and wondering if I have the guts to tackle the elephant.
Wondering if I could perhaps double my money invested.

Furnishedowner

12

The house we bought from the online auction turned out to be one of our best financial deals. It was kinda like this situation. Was listed locally with a Realtor. When we checked into it, we were told we’d have to go thru the auction website. I think there was only one other online bidder besides us. This was a small 2/1 with a garage. About 850 sqft or so. Hardwood floors throughout. Needed slight roof repair, floor refinishing, new vinyl flooring in bathroom and a closet, and paint a couple rooms. Got it for 10k. Put about $2500 in it. Worth about 25-27k or so. Ended up having to put in a new sewer line. One of the neighbors over there told me he was thinking about buying it, but he heard the previous owner had plumbing problems. I told him the sewer line didn’t scare me because I could get it put in for about $800. He was shocked when I told him what we got it for.
Only downside of the auction was the $800 auction processing fee I had to pay. The house rented for $500/mo just as soon as I got it done. Good tenant who takes care of it.
So we could’ve doubled our money, but I’d rather hold something like this.

You can probably get an entire HVAC system put in for 4-5k. Just figure that in and see where you’d have to be.

13

Thanks, Justin for your advice. That house has 2 HVAC systems because it is such a monster–3000 SF+. So I can calculate what it should cost to get it running.

The good thing is that I don’t love it so it would not be an emotional bid. I have pursued about 6 different potential deals now and I keep looking. While I do my day job of renting out furnished rentals.

Furnishedowner