Buying property at auction
Avoiding the pitfalls
Many new investors assume that buying a property at auction is a sure way of creating profits – but just because a property is being sold at auction is no guarantee that it is a bargain.
You need to understand the pitfalls as well as the potential – and that means understanding that there is more to buying at auction than waving your card to get noticed by the auctioneer.
Auction properties come from a variety of sources, including private sellers, investment funds, property companies and government agencies, as well as banks and others.
There are several types of property found at auctions
“Hard to market” properties - where the demand for a property is hard to gauge, sale by auction is often the quickest means of marketing. This can include properties like public toilets, water towers, or even things like bunkers. You may need to be creative to see the profit potential.
“Niche” properties - which tend to be of interest only to specialist buyers. These could include residential investment properties with regulated tenancies, freehold ground rent investments or blocks of lock-up garages. What are you looking for? Can you redevelop or convert?
“Defective” property - which can have either structural problems or problems with legal title, meaning that the vendor needs a cash buyer. Structural defects can range from properties with older-style kitchen and bathroom, all the way through to properties with significant defects like serious subsidence and needing underpinning. Can you make unmortgageable properties mortgageable?
Repossessions and quick sales - many lenders - banks and building societies - will use an auction to sell repossessed property - this is where they need to be seen to have marketed a property. Other properties are auctioned by probate executors or vendors who want to sell before they are repossessed. Can you afford to hold on and profit from a conventional sale?
Whatever category interests you, securing a bargain property at auction requires some research and preparation.
- Review the catalogue. Catalogues are online – go through each one to find the properties that fit your investing strategy, or where you can see a profit. You are only interested in certain types, locations and condition. Draw up a shortlist.
- Read the Conditions of Sale and any Special Conditions of Sale. Make sure you have read all the small print. There could be extra charges from local authorities or VAT on commercial property. You don’t want to be hit with an expensive surprise when the hammer falls. Check that there are no restrictive covenants.
- Check the payment details. The moment the gavel comes down you will have exchanged contracts. You’ll need to pay a deposit - typically 10% of the winning bid/price. Typically cheques are not accepted bankers drafts or credit cards might be accepted.
- Inspect the property. Never buy sight unseen. The catalogue will not list the problems with a property – you will have to see them for yourself. Unless you take into account the location of the property, the accommodation and layout, and the condition, you cannot be sure you are offering the right price. You may need to take a builder or other expert along to see if there are structural problems. There is, of course, an upside to your inspection. You will be able to see just what needs to be done to turn the property around, what needs to be spent and what kind of profit you could be looking at.
- Go through the legal pack. The legal pack should have copies of the title deeds and title plans with boundaries and rights of way, any leases, planning consents - if you are buying to redevelop then you won’t want to unwittingly buy a property with restrictive covenants. If the property has planning permission, you’ll want to know the details including restrictions and conditions. You’ll want to know if there are drains running across the land and where they are, and about easements and rights of way.
- Decide on your maximum bid. You need to set the maximum amount you can afford to bid. You need to decide what the maximum price is that makes sense to you, bearing in mind your plans for the property. Having then decided what that figure is, you need to commit to sticking to it and not to exceed it. Ignore the guide price quoted in the catalogue. Each auction house will have different ways to set a guide price. Some set it lower than the reserve, to generate interest. Some auctioneers don’t even give guide prices these days, preferring to suggest a “starting bid”. This is usually lower than the reserve, and gives a potential bidder hope that they may be able to buy very cheaply. Invariably a winning bid will be much higher than the starting bid, but may well still be a bargain.
Remember – it is always tempting to buy at below market value (BMV). But there is no point in buying a property at a discount if it is a poor property that you shouldn’t be buying at any price. No amount of discount will ever make poor property good, even if a low price can mean a good property great value.
To decide how much you will offer, you need to do some homework. What are your plans for the property – what is it really worth to you, and what price would make it a bargain? How much work will it need? What is the target price if you are planning on reselling – or what is the income if you are planning on renting it out? You should take professional advice before you bid, and look at asking prices for similar properties in the area. Working out the profitability of a renovation project isn’t always straightforward – but you will need to use your experience and judgement. If a property is only cheap because it needs lots of costly work, it might not be a bargain at all.
Arrange your finance
if you aren’t buying for cash, you’ll need to arrange finance for the property – and you need to do this before the auction. You’ll need a valuation for your lender, and at the very least, an agreement to lend in principle, before you bid. As the auction conditions are likely to require you to complete extremely quickly (the time period varies from auction to auction and even property to property but 21 days or 28 days is typical) you might need to go to a specialist lender who is familiar with auctions and can process an application quickly.
At Rangewell, we can help with Auction Finance. This is similar to Bridging Finance, but may be less expansive. It is designed to provide short-term funding to let you buy at auction, and to be replaced with longer-term finance such as a Commercial Mortgage.
So if you are thinking about buying at auction, why not call us today?