The first property auction I ever attended as a young man was in a posh hotel, just off Sloane Street in London, and I can still remember how incredibly nervous I felt....
The first property auction I ever attended as a young man was in a posh hotel, just off Sloane Street in London, and I can still remember how incredibly nervous I felt. The room was packed and everyone seemed to know exactly what they were doing – except me, of course.
I was almost too scared to move and terrified in case I scratched my head or even looked at the auctioneer, as I was convinced I would end up accidently bidding on and winning some multi-million pound property. Needless to say, that didn’t happen – I subsequently learned it would never actually happen in practice – and since that day, fourteen years ago, I have overcome my nerves and learned a fair bit about buying at auction. Everyone knows you can pick up some great bargains, but it is by no means straightforward and you can just as easily end up losing a lot of money if you are not careful - there’s usually a good reason why that five bed house only has a guide price of £10,000.
Here are my top tips for a successful property auction purchase:
There are a plethora of auction companies up and down the country. Some deal only with local property others with property nationwide. Some deal just with commercial, some solely residential, some are small affairs upstairs in a pub, others attract hundreds of people. Within those broad categories, specific auction houses have strengths in very specific locations and very specific types of property. Find out which ones deal in the types of properties you are interested in.
I subscribe to a very useful service called Essential Information Group, which saves me huge amounts of time (my most valued commodity) and searches all the auctions for properties fitting my criteria. It costs around £400 a year and has several very useful features to help you do your due diligence. I think it’s well worth it, but if you don’t want to pay that, you can register to receive online catalogues from all the auctioneers and do the work yourself. Just use a search engine to find them.
Familiarity breeds confidence
Before you enter the lion’s den for real, familiarise yourself with the way everything works. Do some trial runs as though you were actually intending to buy: order catalogues (most are available online), select properties of interest and do your due diligence properly, including going through legal packs (see the checklist below), conducting viewings, setting the price you would be prepare to bid up to and of course attending the actual auction. You should even speak to the auctioneer before hand to practice your negotiation skills. Do it several times before attending one for real. That way you will be brimming with confidence when you are ready to buy and not make a silly decision due to nerves.
It is essential that before you bid on a property that you have a legally qualified person review the legal pack. There is no end to the strange, legally binding conditions, rights and restrictions that may attach themselves to a property such as covenants and easements, and you must be aware of these.
Fact: you will not win every bid. It could therefore become very expensive if you keep incurring legal fees for properties you do not end up buying.
It therefore make sense to educate yourself on the basics so you can minimise the amount of time a solicitor needs to spend on reviewing the legal pack. Build a relationship with a solicitor with relevant experience. You can use the Freehold Property checklist below to do some of the groundwork yourself.
Setting your limit
Rightmove, Zoopla, Hometrack, etc. provide an abundance of information to enable you to see what similar properties have sold for, or are currently on the market for. It should give you a fairly good idea of what your property will be worth - if it’s in a decent condition. But, as noted above, a site visit is vital - even apparently inconsequential matters like which side of the road a property is on can have a bearing on its value. Work backwards from the eventual value, taking into account refurbishment costs and a decent profit margin, to calculate the maximum sale price you are prepared to pay.
Do this in a cold analytical manner. Write it down and stick to it. Whatever you do, you must not get carried away in the excitement of the auction and bid above the limit you have set. When the gavel comes down, the contract is concluded and you are legally bound to complete – there is no room for changing your mind afterwards.
You will notice that many auctions offer properties with tenants in situ. In some respects, this is a positive thing, as you will have an immediate income. However, it is sometimes not possible to view these properties before the auction as the landlord does not want to disturb the tenant, does not want the tenant to know they are selling, or (possibly), they have something to hide.
Some people are prepared to accept this risk and take the view that if there is a tenant in situ, then the property must be in a reasonable state. I personally think it’s a gamble and not one I would be prepared to take (especially as we normally invest using money from Joint Venture partners). If you really want a certain property, ignore what the seller says, pluck up the nerve and go and knock on the door. Explain that you might soon be their new landlord and ask the tenant politely if you can have a quick look round. They won’t always allow you to, but it’s worth a shot if you really want the property. If they do let you in, ask the tenant about any problems that they would like fixing and check as best you can for signs of damp or major repairs.
The Auctioneer is not your friend.
A good auctioneer will encourage, charm or even bully the audience into paying more than they might have wanted to pay. He is performing a role and his responsibility is to achieve the highest possible price for his client. However charming he may be, remember, he is not your friend. It is also worth knowing that an auctioneer is allowed to pretend he has taken a bid from the floor in order to drive up the price, provided he does not go above the reserve price. Though, if you have set your own limit on the price you are prepared to pay, this shouldn’t affect you.
Before and after an auction
If you do not trust yourself to keep to your limit, there are opportunities to pick up a bargain either before or after the actual auction. Once you have the catalogue and done your due diligence, you are at liberty to make an offer on a property. Sometimes this may be accepted, though in our experience, it doesn’t happen often as most buyers want to be sure they are getting the best possible price. It also means that the auctioneers know they can get at least that price when it goes to auction and possibly more. Conversely, we have been able to pick up a number of properties post-auction. These properties hadn’t reached their reserve price and the sellers expectations have been modified to a more realistic level.
By Frazer Fearnhead of the House Crowd.
The House Crowd is the world’s first crowdfunded property investment vehicle.