Snatching Victory From the Jaws of Defeat (Part I)

When you buy a property at a significant discount to market value, it is, for all intents and purposes, pretty hard to screw up the deal.

Here’s a little anecdote about how we came pretty close to doing exactly that.

401 S El Cielo was purchased at Trustee Sale Auction (as all of our properties are) on 4/26/11 for $69,606.01.  I include the exact amount here because it is indicative of the limited competition at the Riverside/Corona courthouses, that is not the case in LA/Orange counties.  Why is it indicative of limited competition you ask?

In bidding for properties at Trustee Sale, the protocol works as follows:

1) Beneficiary provides a published bid- this is the amount owed on the property, plus liens/judgments etc.  This is provided days, sometimes weeks in advance of the property’s sale date.

2) Beneficiary provide an opening bid- this is the beneficiary’s perception of current market value of the property.  This is provided sometimes the day before the sale date, but usually the morning of the sale.

3) Bidders qualify for properties by providing cash or cashiers checks (realistically, no one rolls to the courthouse with a wad of Benjamins for this purpose, it is always cashiers checks) in amounts greater than the opening bid.

4) The auctioneer opens the bidding on a property at it’s opening bid amount.

5) The first bidder, if any, bids $.01 over the opening bid amount (this is called a “penny over” bid- we Trustee Sale folks aren’t particularly creative).

5a) If no bidders, the property reverts to the  beneficiary.  This homeowner has now been foreclosed, and the property is officially an REO.

6) A second bidder, if any, bids a minimum of $99.99 over the most recent bid.

7) Any further bids are increased by a minimum of $100 until there are no further bids.

So why did I walk you through that?  Because any time you are able to buy a property on a “penny over” bid, it means you:

A) Bought something no one else wanted/qualified for/had on their radar.

B) Either got a tremendous deal or will lose your shirt.

We at Real Estate Legends try to keep our shirts, whenever possible.  If you’ve ever been to the beach with any of us, you would probably agree with that sentiment.

In any event, 401 S El Cielo was a penny over bid, and we were excited.  Once we were able to access the property, it was determined that the property did not require extensive rehab, minimizing both our investment and the amount of time it would take to re-sell.  Again, stoked.  Very stoked.

But then… we made a mistake.  A big mistake.

I’ll talk more about that in Part II, next week.

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3 responses to this post.

  1. Posted by leonard on October 26, 2011 at 3:51 am

    dumb question – I have attended Riverside auctions before with numerous cashiers checks in various amounts. I have heard some of the pros just make the checks out to themselves and then endorse them over to trustee. Is this true and/or your recommended procedure?
    Also, how to deal with check amounts? For past auctions I have brought numerous checks in different amounts. But I am thinking about just bringing one check. Eg, if I am going to bid on a house I will pay up to $80k, and another that I will bid up to $75k, should I bring a check for $155k and then just get refund if I don’t get one or pay less? How long does

    Reply

  2. Posted by leonard on October 26, 2011 at 3:51 am

    . . . it take for trustee to refund overpayment?

    Reply

  3. Yes, we have the checks made out to ourselves, and then endorse them over to the trustee. Why do we do this? Safety. If you’re going to a predictable location with a predictably large sum of money on you, you want to make sure that money is secure. If it is a cashier’s check made out to us that can only be endorsed for a specific purpose… that’s pretty secure.

    As for the amounts- get a really good personal banker. The amounts are a pain in the ass. Since we use investment capital, we can’t sit around for two weeks waiting for large sums to be returned. Thus, we start with denominations as low as $500, and go up to as large as $50,000. You can bring one check if you want to, but it’s pretty obvious what your maximum bid is if you keep stopping at a certain amount and you have only one piece of paper in your hand 😉

    Reply

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