Over the past few years aspiring investors have taken to the auction houses in search of a bargain. But although there’s no doubt that amongst the lots on offer there’s certainly a great deal or two to be had, not every property that goes under the hammer will be right for you, your investment goal or your strategy.
Many associate auctions with repossessions and below market value properties; but these are not the only types on offer. There are also lots from a variety of other sources… from private sellers, investment funds and property companies, to government agencies such as the Metropolitan Police and the Army, as well as banks and those that need to be seen advertising the sale as widely as possible.
So how can an investor that’s new to the game figure out which properties are most likely to produce the results they desire?
Arguably, the best time to buy at auction is during a downturn or a slowdown in the property market when buyers are wary of committing themselves and when they’re more likely to be out-numbered by sellers.
However, even during a buoyant market there are bargains to be had, just so long as you complete comprehensive research and have a clear understanding of how property auctions work.
The first step to buying at auction is to figure out the type of property that fits with your investment strategy. Your criteria may be based on location; some investors choose to only consider local properties that they can manage themselves, where as others prioritise location to help build up an existing portfolio that’s already in operation.
Alternatively, you may wish to select properties on the basis of type; you might be interested in commercial, or vacant residential, or residential investments with tenants in situ. Defining your auction strategy is the first step toward making a purchase that’s right for you.
Having assessed where your next property purchase fits in with your plan, now’s the time to conduct research into the lots that are up for grabs. Browse through the catalogue and take some time to go through the Conditions of Sale and the Special Conditions of Sale relating to those that interest you. Then, ensure there’s nothing in the small print that would deter you from going ahead.
Secondly, refer to the legal pack, which should include title deeds, any leases, planning consents and additional information that may sway your decision, and make sure that the lot will work in line with your investment strategy. For example, if you have plans to redevelop, check if there are any restrictive covenants that prohibit development. Also, take a look to see if the property has a defective title (like a short lease of under 60 years on a leasehold property) – because if you’re not a cash buyer and need to raise finance against it, you’re sure to come up against a brick wall if it does.
It’s essential that you have a keen eye for detail and conduct your analysis thoroughly to ensure you’re in with a chance of purchasing the best property for your needs. And if you do decide to bid for the property, you’ll need to get a solicitor to give the legal pack the once over too.
Upon having identified a lot with no adverse conditions attached, head out to inspect the property – and if at all possible, take a professional along who will almost always spot something that you wont. Either way, visit the property because you should never buy without viewing first.
Take a look at the layout and condition of the property, and keep an eye out for any substantial structural defects. If the property does have significant defects, consider if this is still a property worth perusing.
Also take the time to assess if you could create greater value from the property by changing the layout. Perhaps it could be split to provide multiple units of occupation; maybe it could be extended, or if occupied, think about the possibility of taking it on and selling at an enhanced value.
Before your inspection visit, try and workout what the property is actually worth – and what it could be worth to you. Use Zoopla or Rightmove to help you identify asking prices of other similar properties in the area and calculate the potential rental yield after costs and fees. Finally, work out the top figure you would be willing to pay at auction to make this investment work for you.
Whilst conducting your research, I would highly advise that you regularly pause and consider what you are trying to achieve in owning this property. Because price should not be the only deciding factor.
Regrettably, with ample talk about buying BMV (below market value) and with many brokers offering properties at supposed 25% discounts and the like, it’s understandable that many new to investing believe that getting a discounted price is the be all and end all of property investment. It’s not.
There’s no point in buying a property at a discount if it’s a poor property that you shouldn’t be buying at any price. Because whilst a discount can make a good deal great, it can never make an otherwise poor deal good. Buying property at auction is no exception.
The cheapest deal or “bargain” isn’t always the best deal; instead, it’s the property that creates a positive cash flow that’s the best choice of the “lot”.
When you find that your numbers stack up and the property meets your criteria, it will then be time to arrange “finance in principle” if you aren’t buying for cash. (However, if you are a cash buyer, still have a full survey and valuation done to give you some peace of mind, and possibly even have an agreement to lend in principle in case you later decide to finance the purchase).
Then, armed with the relevant information and research, you’ll be ready to begin.
Before the bidding starts though, think back to your top-bidding price and make sure it’s set in stone – this way, you’ll be on the road to executing a sound and successful business model that will reap the returns you expect.
Peter Jones B.Sc FRICS
By the way, I’ve rewritten and updated my best selling eBook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to ThePropertyTeacher.co.uk