Auction Buys

Julio asks what Dave thinks about buying a home via auction.

QUESTION: Julio on Twitter asks what Dave thinks about buying a home via auction.

ANSWER: I think it’s a great idea. You need to know what the terms of the auction are. There are two types.

There are auctions that are absolute auctions, which means that the property is absolutely going to sell that day no matter what the bid. If the bid is $1, it will sell.

The other type is with reserve, and that means that there is a price that the auction bid has to exceed before a sale occurs, and you don’t know what that price is. Let’s say they had a reserve price of $200,000 on that house. Unless the bids go over $200,000, the seller reserves the right to not sell it. Most of the time, if you get a bid for $180,000, the auctioneer will put the seller in a corner and try to twist his arm and get him to buy it because the auctioneer makes a commission if it sells. If it doesn’t sell, they don’t make it. They make their auction fees, but they don’t make the commission in most markets. You’ll see the auctioneer trying to convince the seller to take the lower-than-reserve bid, but you have no guarantee you’re going to buy the property that way.

The second thing you need to look for is to make sure that you understand all the terms of the sale, which means when you’re going to get possession. Is there a title insurance policy furnished? Is this a bankruptcy or a foreclosure auction, and how does that legality play into the actual conducting of the auction and so forth? Or is it just a straight auction?

But I bought a lot of property at auctions, and sometimes you can sneak up on one. I went to an auction one day. In Tennessee and Nashville, it doesn’t snow much. We get two or three little snows a year, and they’re an inch or two inches or three inches, and they’re gone in 24 hours. But you might as well have had the blizzard from Nanook any time it even just spits white stuff because people go crazy. Their cars start spinning. I mean, we don’t know how to drive in the snow. We’re in the South, okay? We have some Yankees that live here that know how to drive in the snow, but those of us that grew up here . . . we just get our four-wheel-drives out and wreck ’em. I mean it’s just ridiculous, but that’s a great time to go to an auction in Nashville, and I bought a house one time in a snowstorm. And I absolutely got an unbelievably good buy on it. I was going to say I stole it, but it was a legal theft, so . . . I did steal it, so I like them. I like auctions.

The danger of an auction for you is that you get caught up in the excitement and the energy and the adrenaline. And before you know it, your bidding looks like something on a bad comedy. You remember those old comedies where Jerry Lewis is scratching his nose and he’s pulling at his ear, and every time he did that, they ran the bid up? And all of a sudden, he bid $2 million for a painting at Sotheby’s or something. You kind of get to feeling that way. You’re like, “Oh, yeah, I’m in! Yeah, I’m in! Yeah, I’m in!” You have to be careful to do that.

I actually suffer from going the other way. The excitement makes me too conservative because I’m afraid I’m going to be rash, and so sometimes I’ve walked away when I probably should have bid and didn’t bid. But you’ve kind of got to know the atmosphere of what you’re getting into if you’re going to buy something, and the biggest deal of all with an auction: Do not go to the auction of a property unless you have done research and you know the value of the property. You need to really know what it’s worth. You can’t just wander up, unless you’ve just got money to burn. But if you want to get a good buy, you have to know what a good buy is, and you don’t know what a good buy is by guessing. You really looked at comparable sales. You did a little miniature appraisal, if you will, and you know what the property is worth and you don’t pay anything more than what the property is worth.

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