If you’re watching “Flip this House” or “Property Wars” on television, take my advice: Turn it off.
These shows are orchestrated BS showing potential buyers doing inadequate research hoping they find a pot of gold in a house. If this is your approach, you will lose.
You would be surprised to know that institutional buyers send people out to take a picture of a prospective house, then they do an examination of comparable sales, and that determines their price to bid at auction.
People who guess about the condition of a property are gamblers, and gamblers always lose in the end. Sure, they can have some great winnings and this is what they talk about. But in the end, if you’re in Las Vegas, the house always wins. If you’re on the streets buying and you try this approach, you will end up like most recreational gamblers in Las Vegas who lose.
What is my No. 1 rule for buying a house at auction?
Go and personally look at the house! Seems elementary, doesn’t it?
I always knock on the door of a prospective auction house with the hope of talking to the occupant to get an idea of the property condition, as well as the occupant’s intention. That person could be the owner, a tenant or a squatter, and I’ve run into all three types of occupants.
If it’s a tenant, you want to alert him of the auction, as you are his friend now trying to protect him while you ask questions to determine what his rent is, if he wants to stay and the condition of the house. This information is critical for your assessment of the property and the tenant. We have bought several houses where we kept the tenant or the owner as a tenant after auction.
The questions you ask will reveal the information you need to know to make an informed decision.
If it’s the owner, you want to know if he plans to stop the auction, either through an ongoing loan modification, short sale, or filing bankruptcy. Or, if he simply plans on letting the house go and/or if he wants to stay and pay rent.
By asking these types of questions, you could find yourself with a great existing tenant who had some bad breaks with job loss or other situations and now he is financially stable again. When we keep these types of tenants, we keep them on a short leash and we demand payment on time. Often, these are people who got used to living “rent free,” or “mortgage free” and sometimes they never have enough financial discipline to pay anything on a regular basis, especially rent.
If the property is vacant, figure out if there is any safe and legal way for you to gain access. This isn’t an article on breaking and entering but I can tell you that you should be able to get in more than 50 percent of vacant houses safely if you are resourceful. Unlocked garage doors, and unlocked doors and windows are all possibilities. In situations where this is not possible, knock on the neighbors’ doors and ask questions as they might be familiar with the house.
This reminds me of two situations in the last year
This house was in a great area in where I have bought a half dozen houses and it had a great setting on the end of a cul-de-sac in the subdivision. I couldn’t get in, so I talked to the neighbor as he was cutting his lawn. He told me the people were clean, moved out, installed beautiful tile and it was in excellent condition. I bought it for $100,000 at the auction and the neighbor was partly right. The tile was beautiful with inlaid pieces, but that’s all there was. The kitchen cabinets, bathroom cabinets, toilets, every light fixture and plumbing fixture in the house was gone! You can’t always believe everything you hear, and that’s why it’s so important to get inside.
I saw the house on a Friday, the auction was Tuesday and the house was torched and burned to the ground on Saturday before the auction after we had looked at it. We were the successful bidders and right before we paid at the auction, a friendly bidder came over and told us about the fire. Yikes! I could have lost $70,000 if this person had not told us about that fire.
These examples illustrate why the most important thing you can do when attempting to buy houses at auction is to personally go look at the houses and that means right before the sale. By doing this, not only will you be able to protect your money, but you will also be able to determine your exit plan and bid accordingly.