Live at the Foreclosure Auction

The single digit temperatures didn’t keep potential buyers away from the foreclosure auction in Nashville, TN last Thursday, January 8, 2015. There were three properties I was interested in and one I was planning on buying, so I wasn’t going to miss it. Here is my account of the events as they unfolded.

Over fifty people are gathered on the second floor of the Davidson County Courthouse lobby. They are still bundled in coats and hats, warming from the frigid morning. I see ten or eleven guys that are the same cast of characters I spot at nearly every foreclosure auction in Nashville, TN. They have their binders, notebooks, and laptops tucked under their arms. I nod at a couple of them, acknowledging that we recognize each other, and even exchange pleasantries with one of them. But I’m not too friendly. After all, they are the regular competition for getting the property that I want.

Today there are dozens of extra people here. I’ve never seen a crowd this large at a foreclosure auction, and I attribute it to the increased exposure of these particular property sales being conducted and promoted through auction.com. Their website gives the foreclosure buying process the appearance of being a bit more approachable and regulated for the unseasoned investors. They make it seem safer.

Title issues are a major concern for these properties. The owners are typically under financial duress, as evidenced by their mortgage payments being unpaid for months. In preparation for purchasing a foreclosure, I typically have a local title company conduct a title search. These searches have revealed some properties that have liens or judgements against them for various reasons including owed child support, unpaid contractor work, an outstanding loan for landscaping equipment, and even a case where illegal drug activity had occurred on the property. In some of these instances, the title issue is too much of a red flag to take the risk of purchasing the property, because that preexisting lien was established before any new ownership takes title. The new owner is potentially responsible for paying any of those loans and resolving any judgements before having a clear and marketable title that can be transferred when selling the property. A more typical issue that is encountered in a title search is finding an unreleased deed of trust. This can occur if a previous owner refinanced their house and the old loan wasn’t taken off of the title. It is still wise to contact that lender and confirm that there is no balance owed. Unfortunately, so many lending companies have gone out of business, changed names through mergers, or sold the mortgage to another company that it can be difficult to even track down the appropriate party.

I am filling out the bidder registration form when a staff member from auction.com asks to verify that I have the funds to bid. I show him the cashier’s check. The guy next to me shrugs when he is asked, as he didn’t bring money to bid. This is an all cash sale, with payment due as soon as the highest bid is determined. That fact alone rules out a lot of potential buyers. How many legitimate buyers are here today?

The crowd is murmuring in soft voices while the auctioneer reads the opening announcements. He continues in the legal language, going on about what all they are not responsible for. His team is merely conducting the auction. They aren’t insuring that any buyer gets a habitable dwelling free from lead paint, mold, radon, or any of the other homicidal components of many a lawsuit. He soon lists the addresses of properties that were postponed or cancelled. The house I wanted is postponed until next month. Bummer.

I study the ornate trim work and plaster detailing on the ceiling of the historic courthouse. Finally, I hear the auctioneer, who is operating without a microphone, state the address of the first property up for bid. I move closer to hear his voice more clearly. 2313 Dennywood Drive Nashville, TN, 37214 is open for bidding. The 1,331 square foot house in the Donelson neighborhood has an opening minimum bid of $70,000. Donelson is “unapologetically Nashville’s hippest community,” according to hipdonelson.org. I haven’t heard of anyone else who thinks that is true. I guess it is an example of freedom of speech. Donelson must not be too hip, because the lender, referred to as the creditor during the bidding, places the highest bid of $81k, and no other bidders appear to care. The house will most likely be entered into the REO (Real Estate Owned) division of the lender, later to be appraised and listed for sale with a local agent on the MLS. At that point, the lender would have taken care of any outstanding title issues, which is a perk for future buyers, but the house is usually in the same condition and sold as-is.

The next two houses are also repossessed by the lenders. In these cases where no investors are bidding, it is simply a matter of there not appearing to be enough equity in the property. If the fair market value is $100,000, and the amount owed on the loan is $98,000, there is no room for profit. In fact, some homes have a balance owed on them that is greater than the market value, which is aptly known as being “under water.”  After figuring in transaction costs, I want to buy at around 65%-70% of FMV (fair market value). And that is calculated with the house in its present condition. I adjust the numbers accordingly for any repairs or improvements. The importance of knowing what the value of a property is worth cannot be stressed enough. Figuring that number accurately is the key to these types of investment deals.

Finally we have some competitive bidding, as 2923 Woodymore Court  Antioch, TN 37013 garners the attention. Two men are going back and forth, raising the bids by $1,000 at each interval. They pause from time to time, appearing to deliberate if they will raise their bid. Is this a tactical maneuver? Bidding seems simple to me. I already know what my top limit is on a property. I’ve already analyzed it and done my homework ahead of time, and nothing changes my mind at an auction. I don’t hesitate when I’m bidding, because I don’t want the opponent to think I am about to back out. If I’m trying to buy a property, I put in my bid consistently. If anything, I want the other guy to think, “He’s going to buy this, so I may as well drop out.” I do not want to look indecisive. At times I will jump the bid up by a larger amount. If a property is going up by $1,000 intervals, I will raise it by $5,000. In a perfectly rational world, this would have no bearing on anything, because all bidders would simply bid up to their limit and then stop. But all buyers don’t think rationally and as emotions get involved, unpredictable behaviors can happen. I’m trying to capitalize on any advantage I can gain, whether it is there or not. The Woodymore house sells for $37,000.

Other auction properties sell in the usual foreclosure hot spots of Antioch, Madison, Donelson, and North Nashville. None of those appeal to me, and the other two I was interested in didn’t happen. Sometimes the sales are cancelled due to logistical errors, or because the owner manages to work out an arrangement with the lender that prevents the final foreclosure from occurring. Today I walk away empty handed, but I know another deal will come along soon enough.

In May 2014, I purchased an East Nashville cottage at a foreclosure auction. The house was in really rough shape, so I had a bid limit right around 65% of FMV. I was able to buy it for less than that, and after five hours of cleaning out the junk in the house, my real estate agent listed it for sale on the MLS. About two weeks later, we accepted an offer. I found the deal and let another investor tackle the time and expense of a full renovation. There was enough margin for both of us to profit. It is a formula that I definitely want to duplicate in the future. For that reason, I know foreclosure auctions will continue to be a source for solid investment properties.