Key Takeaways
- Buyer premiums can significantly reduce auction deal margins—always include in analysis.
- REO-to-BRRRR can produce exceptional cash-on-cash returns with minimal capital left in deals.
- Partnership structures with IRR waterfalls distribute returns based on performance.
- Three-scenario modeling ensures you understand the range of possible outcomes.
Real-world case studies illustrate the application of REO and auction investing concepts.
Case Study: Auction-to-Flip
An investor won a foreclosure auction at $95,000 for a property with $165,000 ARV. Buyer premium: $9,500 (10%). Total acquisition: $104,500. Renovation: $32,000 over 10 weeks. Holding costs: $4,500 (3 months). Total investment: $141,000. Listed at $162,000, sold for $158,000 in 22 days. Net after selling costs ($12,640): $145,360. Profit: $4,360. IRR: 12% annualized. Lesson: the buyer premium significantly reduced margins—factor it into your maximum bid.
Case Study: REO-to-BRRRR
An investor negotiated an REO purchase at $115,000 (listed at $139,000, 90 days on market). Renovation: $28,000 for rental-grade updates. All-in: $148,000. Appraised at $195,000 after renovation. DSCR refinance at 75% LTV: $146,250. Capital left: $1,750. Monthly rent: $1,400. Monthly expenses (PITI + management + reserves): $1,280. Cash flow: $120/month on $1,750 invested. Cash-on-Cash: 82% annualized. IRR including appreciation: 45%+ over 5-year hold.
Case Study: REO Partnership with IRR Waterfall
Operator identified 3 REO properties (total acquisition: $380,000). Partnership raised $500,000 ($380K acquisition + $120K renovation). Waterfall: 8% preferred return, then 70/30 split. After 18 months: 2 properties flipped for $310,000 net, 1 retained as rental valued at $175,000 with $130,000 DSCR loan. Total distributions: $525,000. Investor IRR: 18.5%. Operator promote: $22,500.
Key Takeaways
- ✓Buyer premiums can significantly reduce auction deal margins—always include in analysis.
- ✓REO-to-BRRRR can produce exceptional cash-on-cash returns with minimal capital left in deals.
- ✓Partnership structures with IRR waterfalls distribute returns based on performance.
- ✓Three-scenario modeling ensures you understand the range of possible outcomes.
Sources
Common Mistakes to Avoid
Not factoring buyer premiums into auction deal analysis before bidding
Consequence: Winning auctions where the effective acquisition cost exceeds the profitable maximum
Correction: Always add the buyer premium percentage to your bid amount before comparing to your MAO threshold.
Comparing auction-to-flip returns with BRRRR returns without accounting for capital recapture differences
Consequence: Undervaluing BRRRR strategy which recaptures capital for reinvestment
Correction: Evaluate not just IRR but also capital efficiency. BRRRR recaptures most capital for redeployment, multiplying effective returns.
Test Your Knowledge
1.In the auction-to-flip case study, what significantly reduced the profit margin?
2.What was the cash-on-cash return in the REO-to-BRRRR case study?
3.What was the investor IRR in the partnership case study with IRR waterfall?