Auctions are where you buy bargains, right?
That really depends on what you consider a bargain. Yes, there are some really, really cheap properties sold at auction, but they are usually cheap for a reason and you’ll usually need to spend a lot more than the sale price to bring them up to the same properties as similar ones in the same area.
I’m not saying you shouldn’t buy a property at auction or that you can’t make money doing this, just that you should be cautious and always ask yourself WHY the property is cheap before you plunge in.
Remember too that the guide price you see next to the property is just that – a guide and in many, many cases, the property will sell for far in excess. At auctions I’ve witnessed, they usually go for at least 25% more than the guide price.
Despite auctioneers’ claims to the contrary, guide prices are set deliberately low to stir up interest.
Most properties also have a ‘reserve price’, which is the minimum the auctioneer will accept, and this is often set well above the reserve.
I’ve seen bids in the auction room go 30% to 40% above the ‘guide’ price and still the auctioneer wouldn’t sell because the property failed to reach the reserve.
Now, you’re probably wondering why the auctioneers just don’t tell you what the reserve is from the outset, but then they wouldn’t whip up so much interest, see?
So why are properties sold at auction? In my experience, there are 4 main reasons:
1: There’s something wrong with it, but what’s wrong might not always be apparent
2: It’s a distress sale
3: It’s not possible to mortgage it
4: It’s ugly and unloved
Let’s tackle no 1 first. What could be wrong with the property?
Well, it might be falling down, or it might need a major repair such as a new roof, or it might be suffering from subsidence. To avoid the risk of buying a property with structural problems, you should have a survey carried out before you bid to find out how much the work might cost you – then add at least 10% on to any estimates you receive.
Less obvious problems could include things like the lease. The property might be sold with a very short lease, or have very few years left on what was originally a long lease. Same problem, really.
If the lease is less than 85 years (check), then you might not be able to mortgage the property. If you’re buying the property with cash, this might not be an issue for you, but you’ll still need to check how much it is likely to cost you to extend the lease otherwise you’ll lose it when the lease expires.
There might be a sitting tenant in the property. Again, if you’re planning to let the property this might not be an issue, but check to see what rent they’re paying as this might be very low and it might be protected, meaning you can’t just steam in there and increase it. A sitting tenant might affect your ability to mortgage the property.
It might be that the property is already let but the landlord has been ordered by the local authority to carry out repairs for the health and safety of the tenant. If this is the case, you will only have six months to do the repairs if you plan to continue to let the property.
Check the Energy Performance Certificate (EPC) too, because if the property has a rating of less than E you’ll have to make it more fuel efficient or you won’t be able to let it after 2018.
There might be an awkward tenant on an AST who isn’t paying the rent, or who has refused to leave. It will be your job to evict them. That’s not easy and it’s not cheap, so make sure you see regular and up to date rent payments from any tenancy you will inherit.
Where is the property located? It might be in an area with well-known social problems, or in a spot that is likely to be hit by a new development such a new road or rail link. Check this out.
Now what about reason no.2?
Often property is sold at auction because it has been repossessed by a bank or building society because the owner hasn’t paid the mortgage and the bank or building society just wants a fast sale.
This alone isn’t a reason not to buy it, but if the owner is in debt there might be debts attached to the property for which you will become responsible. For example, you will have to pay off any outstanding maintenance, service charges and ground rent. Get a solicitor to check this out before you bid.
Occasionally a property is put into auction because it’s part of a deceased person’s estate and the executors want to get rid of it as soon as possible, but usually they are also looking for the best price so these properties aren’t necessarily going to go cheap.
So, what about reason #3?
Why would you not be able to raise a mortgage on the property? A number of reasons. It might be that it was recently bought (maybe by a developer) with finance and lenders are reluctant to refinance a property that has been re-sold within less than six months. Again, this might not bother you if you’re a cash buyer, but if you’re not, it could be a huge problem.
Or the property might not be of standard construction. I was recently intrigued by a flat for sale in Derby, with a guide price of just £25K.
The photo in the auction catalogue was of the front of a large, solid-looking Victorian terraced house, which seemed, at a casual glance, to be fairly sound. I wondered if the flat was horrible inside, but that wouldn’t account for such a low guide price and anyway, I was suspicious because no viewings were allowed. The auctioneers claimed this was due to the fact there was a tenant in the property, and it’s true that some auction houses won’t do viewings on properties with tenants, but I was suspicious, so I carefully examined the floorplan, and realised the flat jutted out from the rear of the building.
When I looked at the back of the property on Google earth, I saw that the flat was an ugly, flat-roofed, concrete addition to the main building. It might still have been a bargain, but it might have been hard to mortgage
Other properties that are often sold at auction include flats above cafes or takeaways, which can also be hard to mortgage.
Still reading? Then let’s look at reason #4, the unloved property.
Yes, it might be that all that’s wrong with a property is that it’s got an avocado bathroom, swirly 1970s carpets and a rat infestation. Nothing you can’t deal with right? It could just have an awkward layout or need a lot of TLC.
The problem here is that every man and his dog is looking to pick up these sorts of doer-uppers at auction, which attract property investors with deep pockets so they usually go way, way over the guide price – in fact, if you’re not careful, you could end up in a bidding frenzy and pay more than you would for a similar property on the open market. Even if you snatch up the property for below the market value, you might spend more in total than you would have paid for one that was already done up.
I’m not saying you can’t get a bargain at auction – there are property investors who have built large portfolios purely through buying at auction – but if you aren’t really, really, really careful, you could end up with more than you bargained for.
Don’t miss tomorrow’s article, the pitfalls of buying at auction and how to avoid them.
If you are tempted to try to bag a bargain at auction, read our beginner’s guide.