Sunday, March 14, 2010

I bought at the auction!

I bought a 1400 sf home in Tacoma to fix and flip yesterday at the REDC auction in Seattle. I was the winning bid on another house, but originally just runner-up on this one. However, the winning bid on this house had failed to provide the necessary funds and I was given the option to purchase both (in retrospect, I should have done this, although I could not demonstrate that I had the funds available to purchase both at the time). Instead, I chose to purchase this one. Of course, it does need work--about $20,000, we estimate.

"We?" Well yes, I have a partner on this one. The only way that either of us could have purchased this house for cash. Together we will fix it buy, market and sell it--and then split profits.

I will include photos and details of the house in tomorrow's blog. But this is a good opportunity to talk about what one needs to do prior to buying at any auction. We were fortunate in that we were able to get into this house in advance and do an inspection prior to attending the auction. As the REDC auction is typically the lender's sale of last resort, these are difficult properties--needing more repair or with other issues such as less desirable locations than other bank-owned REOs. The property was also vacant, which eliminates lots of issues with evicting tenants or owners.

This house is in a good solid working class neighborhood, near shops, restaurants, highways, and the lovely Wapato Lake park. It is not in a war zone. Very important. This is a nice, decent residential neighborhood.

Then we went back to check comps on sold properties in this area in the last six months. I like to have at least 4 comps to feel confident about values. This neighborhood had 9 solid comps. So good activity, good confidence in the ARV (After Repair Value).

We then estimated our repair costs by breaking out each of the repairs we would expect to have to do to this property. We then subtracted these costs and determined 70% of this amount to allow for error and profit margins. We then deducted the 5% we were required to pay for the auction premium to determine our maximum bid on this property.

Our purchase price was actually below the seller's reserve price, so the seller (the bank) has 15 days to decide whether to accept our offer. This gives me additional confidence that this is a reasonable price for an investor to pay for this property. Stay posted!

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