Many people think a real estate auction is the most accurate way to determine the true value of a property. But auctions have a lot of different dynamics many people don’t know about. One of them is something called a shill bid. A shill bid: when the seller (or auction company) has a third party bid on their item solely with the intent of driving the price up and not for the purpose of buying the property.
Shill bids are often used to get the price up to the seller’s reserve price (this is the minimum the seller will accept for the property). It can also be used to drive up the price when active bidding is going on.
Here is a typical auction scenario: Single family REO with an opening bid of $350,000. The opening bid is greatly below value and it does the job, people start bidding like crazy. The property reaches a price close to the FMV (fair market value) of $475,000. The bidding starts to settle down and all of a sudden a new bidder comes into the mix. The auctioneer announces that the bidding will now increase to increments of $5000.00. So the new bidder (our shill) bids $480,000 and the husband and wife who were so close to getting their dream home at $475,000 now need to make a decision if they want to go higher, they do and win at $485,000. Ten thousand more than their “wish” price (as my mentor, Ken Stimson would say). Was it worth it? Or did the auction company capitalize on emotion and use a shill bidder to get $10,000 more?
The answer is YES they did. You can find big winners at auctions but you must know how the game is played and keep to your rules.
My List of Suggested Rules is:
- Property due diligence – get comps and run the numbers to see where the price to buy makes sense. This will also include having an “unofficial” inspection. Bring your handyman or contractor to the scheduled open house and have him give you a ball park on repairs needed.
- Make sure you take all the opportunities given to view the subject property.
- Make sure you know if there is a reserve price and what the fees are.
- Multiple Properties – try and research multiple properties that you might be willing to purchase. This does two things:
- makes you look like a player if you are bidding on more than one property
- doesn’t allow you to get all emotionally tied to just one property
- If bidding starts out fast and furious, hang back until the bidding starts to die down. Don’t fuel the fire.
- Often the first properties up sell for less because amateur bids will sit back and try to get the lay of the land.
- I believe you should look like a professional (this advice often raises differences of opinions). If you are a professional, look like one.
- The best auction advice was given to me by my mentor – know your “Walk away” price and stick to it. The property didn’t get any more valuable because someone else is willing to pay more.
You don’t have to use my rules but if you stick to a set of rules it will ensure greater success.