Last Updated on October 5, 2020
Introduce Yourself and Make Contacts
Never bid at the 1st auction you attend. Go to a few, make friends with the people you see bidding by inviting them out for a drink, snack, or a meal.
Most strangers will gladly accept. Then, no harm in saying:
“I am in total ignorance about how these kinds of auctions work, and I’d like you to explain it to me.”
Listen and learn. Don’t take the word of just one person. Ask several. Getting the tricks of the trade from an old timer is the best way to learn. Read up and seek out any material available
First Rule, Learn Terms of the Auction
You have to know the terms of the auction. There are:
- Tax sales
- Storage locker sales
- Government (IRS) sales
- Confiscated items by customs
- And zillion other kinds of sales taking place every day
These are all opportunities for you to make easy money.
The terms of the auction (often in very fine print) are going to be important.
Only when an auction is advertised “No reserve” this means you actually win the property for submitting the top bid.
Once I bought the entire contents of the Newberry Library in Chicago for $10!
Why? Because it was “no reserve/absolute sale for cash.” There were no other bidders.
That was one of my better deals. Another was a small island in Marin County California that had no access. It cost me only $10.
Who would want a little island in the middle of a creek? But when I bought a property directly across the river for access and had a small bridge built, I made out like a bandit.
My patch of weeds became an “exclusive island building site” once it had good access.
Being able to visualize the potential of something nobody else wants is what will make you Think Like A Tycoon.
But beware . . .
Auctions Are Not Always What They Seem
Some auctions can be misleading teasers. One enterprising broker in Panama publicly advertised for a minimum “sealed bid” bid of $100,000, a condo apartment worth $500,000.
Instead of oral bidding, people were instructed to put their bid on a sheet of paper with their name, contact info, and a check for 10% of the amount bid.
The winner would be announced at the property on a certain day at a certain time.
At the time, there was a slump in Panama real estate, but as anyone in the game knows, property for sale at substantially below the market price will move fast.
I bid the minimum $100,000 plus $10 by sealed bid. Then I went to the public auction/reading of the bids. There were maybe 100+ bidders all hoping that their low bids would win at this auction.
Why so many bidders? Only because it seemed to be such a potentially good deal.
The bids were read. Mine was not the top. But then to my surprise, the auctioneer asked the audience if anyone was willing to bid more.
As I knew the property was worth $500,000 and I could sell it quickly for around $350,000, I increased my $100,010 bid to $200,000 and won… I thought!
Then in private, along with the bidder just below mine, a guy who had bid slightly less and thought he had “lost” – we were told after the others had left, that the auction had a secret reserve price that we didn’t meet.
The words “subject to minimum reserve price” was in the fine print of the auction announcement!
Thus, I found out my “minimum bid” meant nothing. Why?
Because the secret unannounced reserve price was $500,000—And that $500K was a kind of high, but fair retail value of the place in a good seller’s market.
It was not a price I would pay in a buyer’s market where my own real retail selling price would not have been much over $350,000.
To make a long story short, my winning bid only got me the “Right” to negotiate a serious real closing price with the seller.
As I would not go above $200,000—that was that.
I had wasted my time! The secondary bidder had some choice expletives for the auctioneer, basically “You have suckered us in here and wasted our time!” I felt the same way.
But as my rule is never make enemies, I congratulated the broker on his clever scheme, smiled, and left.
Later I was able to make a good deal with this same broker.
But the sleazy broker was a big winner because he now had a customer list of 100 people with cash who were interested in bidding on bargain properties of which there were many in Panama at the time!
The moral of this story is to read the fine print on the announcement of the auction.
If it doesn’t say “without reserve” don’t assume you will win it with a high bid. No harm in going to such auctions—placing a low bid to see what happens.
Normally in an ethical auction, when the reserve or minimum bid has been reached, the auctioneer will announce “going once for $X” and then say something like “The reserve has been exceeded.” From this point, the winning bidder will get a deed to the property at the close of bidding.
You can’t go wrong in any auction with a very low bid like $10.
Then if you win, see what happens. If the winning bid has to be court-approved as in probate or bankruptcy, you probably won’t get the property, but in such cases, sometimes in my experience, the court-appointed appraiser would prepare a low re-appraisal and said, “take it at this price if you are serious”. And sometimes I did!
More often, under the rules of the game in many jurisdictions, there would be a second auction. To overcome your winning bid, any new bidder would have to increase the price by 10% or 20%.
This would not be important if the bid was only $10. But many of my winning bids were pretty high, like $100,000. Cash overbids were not always forthcoming.
So even with a very low bid, I would get the property. I’d be able to do some minor cosmetics (paint) and flip it at a considerable profit.
As in any profession, you must know what you are doing, learn from your mistakes, and in the case of auctions, have a friendly lender or cash-rich investor who is willing (for a generous fee or cut of the profits) to put up the money needed.
Very often I bid at tax sales and oddball auctions and on little un-buildable slivers of land. These leftover pieces, or “plots” as they are called in the trade, came into being when things like roads or public utilities were built.
They were sold for peanuts. I often got them for my laughable $10 bid. I was usually able to sell these tiny vacant plots to adjoining owners, but that is another story.
If I told you how much money I made bidding for bargains you wouldn’t believe me, but in a year, I cleared more than the average Joe could save in three lifetimes.
If I could do it, so can you.