Part 2 of 3: The Waterfalling Estate
I had never even heard of a real estate auction. Would there be a swanky event with champagne and passed Hors-d’Oeuvres? Would we be assigned a little paddle with a number on it? Would a sinister looking James Bond villain type sit in the back and outbid us?
“No, it’s all done online.” Josh, the Sothebys rep said. “You have to pre-qualify for the reserve price of $6mm (minimum opening bid price), place $100k in escrow to register for the auction, prove that you have the Buyers Premium of $720k in cash ready to pay to Sothebys if you win the auction and you must close on the acquisition in 30 days, all cash. Oh, and it’s an ‘as-is’ purchase. I can send you all the disclosures.”
Oh, is that all? I thought sarcasticly to myself, would you also like rights to my first born?
Is the $720,000 Buyers Premium returned if a buyer fails to close in 30 days? I asked.
“No” said Josh, “that money goes hard immediately and must be paid within three days of the auction closing. However, we are willing to pay anyone you choose a 2.5% referral commission on the full purchase price.”
I smiled. At least my real estate agent wife Lori gets a big win! I’ll be the husband of the year, but that appears to be the only thing I like about this draconian process for purchasing real estate. Too much risk, and I’m Mr. Risk feeling this way!
As much as I wanted to participate in the auction, out of my appreciation for the property and its potential value, I was not in a position financially where I could fulfill the last condition to close in thirty days in all cash.
Even if they let us get financing, banks just don’t move that fast anymore. Plus, it was clear that the Buyers Premium would not be recorded as part of the purchase price (only the winning bid amount would) and therefore couldn’t even be applied to any down payment if we could get a loan. Plus interest rates were trending past 7%. I never use the word “impossible”, but tough sledding for sure.
I told Josh I would have to think about his company’s terms, but in the meantime, I invited him and his girlfriend to a party I was throwing that night for my Bliss Island staff. I wanted to get to know him better and thought it would be a great setting to do so. He actually showed up and we became friends, a relationship that would prove valuable later on.
We not to register for the auction cause we could not see a path to come up with the cash if we won. We assumed the bidding would reach the $9 million stratosphere, which would make the property too unattractive. When we go after big game real estate, the property needs to be undervalued. With that kind of price, it would be just under market value with not enough upside. This would be a losing hand and not the way we play.
The auction came and went, with no bidders. Wow, what a surprise!, I thought.
Even more surprising is when my new friend Josh called me to tell me the owner authorized a second auction. When we first met, Josh conveyed that 82% of their auctions produce a buyer, so a second auction must be super rare.
I asked Josh if his higher ups would consider modifying their ridged rules for me. I didn’t hear back. But, I did notice that the second auction came and went without any bidders.
Josh called me again, “Eric, I have never seen this happen since I began working here, but the owner just agreed to a third auction and dropped the reserve price from $6 mm to $5.75 mm. Are you interested?”
Ah, I love the smell of leverage in the morning! 😎
Well Josh, I said, considering that your company has produced two failed auctions, perhaps it’s time for your bosses to consider my alternative terms.
Silence for about twenty seconds, then Josh says, “Send them over and I will run them up the flag pole for you!” I got the feeling that Josh was really going to bat for me and my request would not be viewed favorably for him.
My Terms
- Only the Buyers Premium would be all cash, meaning we could attain financing
- 90 day close, instead of 30, so we would have plenty of time to attain financing
- Only $200k goes hard and we can terminate for any reason at any time
- If we do terminate we get four free week long rentals over the next two years to host retreats so we can recoup my loss
The third auction began without Sothebys replying to my terms. I figured they were gonna pass. Meanwhile, I was on vacation in Costa Rica with Lori feeling zero pressure convinced that we were the only buyers. Leverage tastes better served over ice while enjoying an epic sunset!
Phone rings with one hour to go in the third and final auction.
“Eric, it’s Josh. The owner and my bosses at Sothebys have approved your terms. You can now place your bid! I think you’re gonna steal this property.”
With twenty minutes to spare, I submitted my bid while boarding my flight for the U.S. We didn’t want others to have sufficient time to outbid us. As our plane was on the jetway, we saw the clock go to zero and our bid won!
What was our winning bid price? $5.75 and not a penny more!
The rules of the auction were that the owner had to accept any bid at the reserve price or higher. The previous list price was $9.95 million. The owner must have been hoping for a winning bid of at least $9 mm. We had indeed, stolen this property.
I turned to Lori and asked, “Is Costa Rica a non-extradition country cause I think we just committed a crime. We might want to ask to get off the plane!”
Lori asks, “We won?”
Yes dear, we won! I may have lost the battle eighteen months prior when the Rock didn’t pick us, but today, we won the war (or at least, the bid!).
We were officially in escrow!
