Note from Paula: This is a guest post from my friend Jason Hull, a financial planner, landlord, world traveler and West Point grad.
In this post, Jason describes how he bought a rental property through a foreclosure-auction website.
Jason built and sold a 7-figure business after two tours of service in Bosnia. He’s got sharp insights about business, finance and life.
Without further ado … take it away, Jason!
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How I Bought a House at a Foreclosure Auction
I’ve been known to buy a thing or two at auctions.
When I was in graduate school, I used to buy random pieces of computer and scientific equipment from my schools’ surplus auctions.
I’d resell these 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 conducted tens of thousands of dollars worth of transactions during those monthly auctions. It was clear that they were doing the same thing I was, just on a grander scale.
My transactions weren’t enough to pay for my grad school education, but it certainly covered beer money during those years.
I never lost money (though I make no promises that it can’t happen to you) when I purchased items at auction, even if a few items remained unsold.
There were three simple reasons why I successfully created a surplus auction side gig:
- Knowing the Prices — I researched the prices of comparable, recently-sold items on eBay, so I knew the current fair market rate. I also researched how much each item recently sold for at my school’s last auction, so I knew my ‘wholesale’ cost. I could quickly figure out whether or not I could an item would be profitable.
- Valuing my time — I goosed up the shipping charges to pay for the time I spent packing and shipping the item. (I wasn’t compensated, though, for my wife’s complaints about a stockpile of inventory cluttering up the extra bedroom!)
- Market Inefficiency. — At most, 50 people attended my university’s surplus auctions, and only about 20 of them were serious buyers. I rarely got into a bidding war. On eBay, though, there are thousands of buyers. Since demand is higher, basic economics states that prices will be higher.
Encouraged by the success of my eBay side hustle, I recently decided to try my hand at a real estate auction. I thought buying tax deeds might be interesting.
But while I was there, I became distracted by a HUGE throng of people attending a concurrent foreclosure auction.
Who are these people? What was happening? I needed to know more.
I sauntered to the edge of the crowd, and saw a live, in-person foreclosure auction run by a company called Auction.com. When I got home, I pulled up their website.
Auction.com’s business model is to sell some properties in-person at foreclosure auctions and other properties solely online. I decided to look for online-only auctions for a few 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, 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 it can become personal. Soon you’ve broken your budget because you’re just trying to one-up that son-of-a-$*#$&#% over there in the corner.
- Fewer people bidding against you. I know this seems like I’m repeating #1, but auction.com is one of many ways that people find out about foreclosure auctions at the courthouse steps. Most jurisdictions are required to publish notices in the local paper of pending foreclosure auctions. That means a lot of other people may come to bid on a property that you want.
My wife and I noticed a few properties in our area that would make good rental properties (if the price was right). We tracked the online auctions to see how they proceeded – just as I tracked the results of my university’s surplus auctions during my grad school years.
A couple of the properties sold for surprisingly high prices, but most of them wound up selling in a reasonable investor range.
Great sign. Next step: enter the game.
I kept watching until a house came up for sale in a neighborhood that had high rental demand, low supply, and strong rents. 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:
- Sign up for an account.
- 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, in case you’re a winning bidder and then back out of the purchase.
I also went through a mini pre-qualification process over the phone. The representative wanted to confirm that I knew that it was an all-cash auction and that the property was being sold “where is, as is,” with no contingencies. I confirmed, and she approved me.
The representative told me that if I placed the high bid, I’d have two hours to electronically sign the contract and that I’d be required to wire the earnest money deposit on the next business day.
That’s fine with me. Let’s start the bidding!
The 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. 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 rises.
I opened the bidding with an offer for $10,000. Soon, I was outbid.
I bid again. My competitor volleyed. We went back and forth a few times.
I then had a (hopefully) brilliant idea. I noticed that my competitors were slow to react. It took between 1-24 hours before they would outbid me. They might be using the e-mail system, I realized, rather than watching the page.
I knew that auction.com would add a few 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 place a bid.
It was time for some careful, calculated maneuvering.
It was the Saturday after the July 4 holiday. My wife and I were on vacation, but I couldn’t relax.
I was glued to my computer with sweaty palms, hoping that the Internet connection stayed solid. We were at a bed-and-breakfast in the middle of nowhere, and I wouldn’t be able to find another connection if our Wifi went out.
I entered my bid. I offered a few dollars more than the minimum increment. If someone else tries to put in an equal bid, I reasoned, mine would be higher.
I got the notification that I was the high bid. The website added two LONG minutes to the clock.
After two minutes (that felt like two years), I received confirmation that we’d won the auction!
We celebrated our big win with lunch, followed by a trip to a winery. As we were sitting outdoors enjoying a glass, the sales contract arrived in my Inbox. I I signed it using my iPhone, right there from the winery.
The next step: Pay up!
Show Me the Money!
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.
I called to ask if I could simply wire the entire amount and accelerate the closing. The representative said that would be fine. The following Monday, I initiated a wire transfer of the full amount.
The deal was now in the seller’s hands.
When properties are bought and sold through auction.com, the seller has 15 business days to accept the price. The bank that owned this property took all 15 days to approve the sale. The closing company then took another two weeks to complete their end of the paperwork.
Real estate can be a game of “hurry up and wait.”
We survived those hiccups, and we’re now the owners of another rental property. We snagged a great deal on the property through the foreclosure auction website, and I’d certainly buy a rental from a foreclosure website again.
Jason Hull is the owner of Hull Financial Planning and a contributor to U.S. News and World Report. He’s a West Point graduate who served two tours in Bosnia, and holds a Certificate in Financial Planning from New York University. As of August 2014, he closed on Rental Property #9.