Bidding strategy for short sales

After processing a few pre-foreclosure sales, I have been surprised at the bidding strategies employed by those hoping to win the chance to buy these homes.

In order to best understand the strategy to employ we need to understand how the auction (or bid) works. The pre-foreclosure bidding process is essentially a sealed bid auction.

In a sealed bid auction:

• Each bidder submits their bid for an item.
• Their bids are hidden from the others.
• The highest bid wins the opportunity to purchase the auctioned item for the amount of their bid.

Let's consider some characteristics of the pre-foreclosure sale.

• Each person has the opportunity to inspect the property before placing a bid.
• Each bidder can have the help of an agent who can pull comparable sales and help determine a fair market value for the property.
• Each of the bids is hidden from the other bidders.
• The highest bid wins the opportunity to purchase the auctioned item for the amount of their bid (as long as the bid meets the 'reserve' requirement of the bank.)

This is a stark contrast from the purchase of a foreclosure on the courthouse steps. The buyer does not have the opportunity to inspect the property. They are buying the home 'as-is' without the ability to have an interior inspection of the home. It requires a completely different strategy (which would be a great topic for a future blog).

But....since we are dissecting the strategy of the pre-foreclosure sale, I will try to stay on topic.

The question is, what should you bid for the property? Well, what you should bid is an extremely simple process. It only requires you to consider 2 things.

1. What is the cost you attribute to the time it will take for the bank to make a decision on the pre-foreclosure sale?
2. What is your valuation of the property?
3. Most important, because it is a sealed auction bid, you can't take into consideration what the other bids are.

To come up with your bid, all you need to do is take your valuation and subtract from that, the cost you attribute to waiting. Voila, you have your bid!

Here is the reasoning. Because you have no information about what others are bidding, you can't take this into consideration. Suppose you feel the home is worth $275,000 and you feel that the cost you attribute to waiting for the bank to make a decision is 10%. You should bid $257,500. ($275,000 - 27,500) If you win the bid at $257,500 then you will have made a great purchase and been compensated for waiting.

Since there is no way to know what others have bid, (this is a sealed auction bid) you should just decide what the property value is to you and make that your bid. If you bid your value then you can't lose. If someone bids more than you do then they obviously placed a higher value on the property and you wouldn't feel bad because you wouldn't have wanted to pay that price to buy the home. If you win, then it doesn't matter what the others' bid because you paid what you felt the home was worth to you minus the cost of waiting. You made a good purchase.

It does you no good to worry or wonder what the other bids are. Because you can't know, you shouldn't take that into consideration (have I covered this enough?). Do your due diligence prior to placing your bid and then sit back and relax. I can't tell you how upset I have seen people get when they are outbid on a home. Well, you wouldn't be upset if you bid your true value. The only way you lose in a pre-foreclosure auction is by bidding less than your valuation of the property.

I hope this helps, good luck on your next pre-foreclosure bid