Maximum Bid Calculation at Trustee Sale


#1

I know there is no exact answer to this, but I’m trying to find out what most pro’s use as a profit % to back into their max bid for the trustee sale. What are the margins most pro’s are working towards? Is calculating a profit of 25% of the sales price (at auction) too large to compete on a regular basis with the regulars?


#2

Mark,
I’m no “pro” but what I think makes sense is that i compare the return on investment to a benchmark ROI such as tax-free municipal bonds. These days, muni’s will get you around 4%. So what you have to do is calculate what AFTER TAX reutrn on investment you’ll get from a trustee sale and flip. For the inherent risk incurred of buyin at auction (i.e. no inspection, unforseen damage to repair, and myriad other risks which could delay a flip), you have to try to go for an ROI that is above the risk-free muni investments (which is your baseline, otherwise, why even do foreclosure flips right?). I chose my risk tolerance to be 3X, arbitrarily. So I make my max bid caluculation at 3x 4%, or 12% after-tax ROI. You have to estimate and take into account all transaction costs, number of months held, carrying costs, refurb costs, and selling costs. Then the ROi calcuation is easy. Anyways, hope that helps.


#3

Wow…that’s quite a bit lower than I would have expected. Thanks for your take on it!


#4

Actually, a 12% or so after tax ROI translates to about a 20% profit of sales price or so (roughly, depending on your tax bracket, and also assuming a short term capital gain treatment…i.e. you sell it within one year). But only you can make that assessment. Also, if you feel that there are no problems with the property, then you can take more risk and go with a slightly higher max bid. And vice versa.


#5

The key on making great profits in any business that involves inventory is how quickly you turn the inventory. For example if takes you 180 days to turn a house and make 25%, I will achieve far better annualized returns turning houses in 90 days at 20%. So to be competitive at auction I’d focus on quickly turning inventory. This has an added benefit of lowering your risk due to adverse market changes.

Traditionally auction investors have looked to purchase at 30-40% discounts to fair market value, with net profits of 10-20%. The best investors can do this with a turn of 90-120 days giving them annualized returns of 40-80%.

So, no I don’t think targeting 25% profit on a single deal will be competitive, but if you work smart you should be able to achieve annualized returns that are far better than that.