Wednesday, August 04, 2010

What is Thy Bidding My Master

How to bid in auctions:
The formulas explained here, in their simplest form, can be applied to any purchase you make with the intent to resell for profit and many other applications, from gold bullion to a piece of real estate at an auction. Given the fact that those real estate auctions are everywhere now you should know this before you bid on one.  There is no big mystery to the math, but the real work is done during the due diligence period before the auctions, which is when experience comes into play.

1) Determine your profit margin. Say you want to make 25% P (P= Profit) on a property worth $180K FMV (FMV = Fair Market Value). Your highest bid (HB) then is calculated as follows:
HB = FMV * (1-P)
HB = 180,000 * 0.75
= 135,000

2) Typically those auctions, live or online, have a buyer's premium (BP) watch out and read the ffine print. So you have to add that to your calculation. In this case your New Highest Bid (NHB) is recalculated as follows:
Assume your BP is 5% (0.05)
NHB = HB / (1+BP)
NHB = 135,000/(1.05)
= 128,572

So 128,572 NHB or thereabouts is your maximum bid to achieve the profit margin you seek. Simple as that.

Keep these formulas in mind when you are buying anything with the intent to resell. Do your homework before you participate in these auctions whether in person or online, and don't get carried away in a bidding war. I know this is not stock related, but it’s similar to figuring out your buy limit order and not chasing a stock. It’s all in the ball park.

Peace and profits to all,

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