How much to bid at foreclosure auction.?

Question

Partner and I are really new to this, but we have been along to watch a couple of auctions after doing some self education online.
How did some of the bidders calculate what the property in question was worth to them? They obviously had maximum amounts they would not go beyond. How was the reserve set? And what is an upset price?- we couldn't find that definition in the glossaries we looked at.

Answer 1

Maggie, the "upset price" is the reserve price set at auction by the lender or the auctioneer.

There are a couple of issues with setting a maximum price. A disadvantage of a foreclosure auction is the inability to inspect the property, and maybe there are tenants to evict; both these factors drive your costs up.
Here's a formula I have used when buying for a resale later.
Determine FMV using comps, appraisals and local expert brokers' opinions. Start with the price you then think you can resell the property for in fair condition.
Subtract any liens or judgments you identify in title search. You may try to settle these at a discount.
Subtract any repairs you identify from an outside view of the property, from local knowledge of the occupants, and build in a cushion for unknowns.
Subtract the costs you will incur as long as you have to hold the property before resale. Insurance, taxes, loan payments etc.
Subtract the closing costs you will incur when you resell the property, including agents commisions if you will use their help.
Now you have arrived at the Gross Profit to you, lets say Total A
Subtract the default or final judgement amount.
Now you have the net profit from the whole deal.

Subtract the minimum profit you want to make from the whole deal from Total A

That's your maximum bid.
The minimum bid is the default amount.
Because of the doubt over repairs, if max=min, forget it.

I am a contributor to the Foreclosuredatabank Discussion Board and the above example formula has been quoted there.

Answer 2

rough outline of how to figure how much to bid ...

if the property was in vgood condition for its age [teardowns are separate subject], what would it be worth? This is the maximum you might resell it for -- your likely income -- less, of course, the costs of selling it.

**
what will it cost to get it to that condition? have you been inside and know what needs doing? has anyone? who?

{how can you find out? who can you ask? get creative here.}

if you don't know, you assume the interior will need to be gutted and completely redone. kitchen, baths, walls, ceilings, floor coverings, paint, hardware, and on and on. Guys with experience in a particular local area usually have a per square foot rule of thumb they apply.

add 10% for error. There's always something you didn't count on -- dying a/c, dead water heater, damaged electrical, rats, dead landscaping, etc.

then add interest and insurance during the rebuilding process, plus management of the project. [NO. you can not skip this because you plan to do it yourself. You deserve to get paid.]

deduct total from your estimated net selling price and then your profit target as well. Viola! maximum bid.

Then ask if the potential profit is worth tying up your capital for that length of time.

***
The mortgage holding institution sets the reserve however it wants to. Early in the cycle of foreclosures, many reserves are set too high and the bank becomes the owner by default.

That's ok ... you can go later to the bank and make an offer for the property subject to inspection, etc. [Subject to reduces risks and thus costs ...]

***
Since I'm not in this business [several friends are or were], I do not know what an upset price is.


does this help?

Answer 3

If you don't know this you shouldn't be bidding, otherwise you're going to find yourself in a heap of trouble.
You need to find some comps for the house. Figure out as best you can how much it's going to cost you to repair/fix up the house you're bidding on, add a good comfortable margin for unknowns seeing as you won't be able to get in the house to do a proper inspection, then do the math. work out how much you can pay for the house + the fixing up cost and see if that leaves you with a profit looking at the comps you've gathered.

Answer 4

check comparable property sales in the area.
know your limits and don't bid emotionally
beware of liens

upset price is the lowest price that the prop will be sold for