Climbing the Property Ladder by Buying at Auction
There was a time not that long ago when property investors could buy a house and then sit back and wait a few months for its capital value to soar, without lifting a finger or spending a penny on improvements. Those days have gone, sadly, which means it is now more important than ever to buy at below market value – and invariably that will often mean buying from a property auction.
At the outset I must underline the fact that property auctions are not suitable for everyone – and novice investors should heed the advice of an old hand, take time to familiarise themselves with the ins and outs of property auctions and attend a few events first before considering whether to take the plunge. All that said, with one in four of all properties now being sold at auction and with almost all of the best priced houses appearing in catalogue listings, there is no better place to find that elusive bargain.
Buying at auction is a double-edged sword and it’s very easy to get caught out by dodgy properties going under the hammer. While it is true to say that most dwellings sold at auction offer the investor the best potential to make money, the very fact they have ended up at auction means they probably couldn’t be sold through the traditional method. More often than not, there will be some aspect of the property that has previously deterred buyers and it will be your primary objective to identify what that might be, before considering whether it is worth making an offer for it.
It is equally important to realise that buying at auction is vastly different to buying through a high-street estate agent. In England and Wales, a buyer can often back-out of a purchase right up until contracts are exchanged, after which they can still back-out, but will lose any deposit money paid. At auction, the potential buyer becomes committed to proceeding as soon as they place a winning bid in the auction room and if they later decide to withdraw from the purchase, they will immediately lose the deposit they paid on the day (usually 10 per cent of the sale price). There is a saying in auction rooms worth remembering … when the gavel falls on your bid, you’ve bought it!
So, with that in mind, here are a few tips for anyone thinking of buying at auction for the very first time:
- Visit a few auctions to get a feel of how they operate. Oh, and tie your hands behind your back, just to be certain you don’t fall foul of temptation.
- Read up about buying property at auction. There are scores of excellent books available on this subject and a huge resource available on the Internet. Make sure you acquire information pertinent to the country of residence or the country of intended investment.
- Never, ever make an offer on a property you haven’t viewed. Those that have made this fatal mistake invariably regret it later, because the dwelling proves to be less of a bargain and more of a millstone.
- Always survey the property carefully and thoroughly. If you can’t afford a professional survey, take someone with you to view it that can offer a second opinion, preferably with the advantage of a background in buying an investment property. Checklists are useful, so devise one beforehand. Include the obvious, such as the style, age and condition of windows; but remember other less obvious matters, such as whether water and heating pipes conform to current standards or whether they are old, leaded or unlagged. A good tip here is to check all ceilings for water stains, as these are a symptom of leaking pipes.
- Find out in advance what the area is like. For example, if you intend letting the dwelling, is there enough current demand by tenants looking for this type of property in this area? Consult the local authority about any changes planned for the area. Investigate how major employers are performing (are any due to open or close down nearby). And often the easiest and most reliable way to find things out … knock on a few neighbours doors and see what information you can extract from them.
- Assess and identify the maximum amount you would be prepared to pay for the property, taking into consideration all the data you have thus far gathered. Compare this with local prices by visiting estate agents in the region and ask their opinion of the locality and its potential for capital growth and/or rental income. Once you have settled on an acceptable maximum price, keep a note of it and aim to buy below this level at auction.
- Keep in touch with your local auction houses and with local estate agents, as they will be able to tell you the next up-and-coming dates of property auctions. They will also be able to provide you with advance notice of auction listings or supply you with a catalogue as soon is it becomes available.
- If you require finance to help buy your proposed property investment, talk to preferred mortgage providers well in advance. You will need to have finance in place on the day you attend an auction, if you want to make a bid. Most lenders are familiar with auction rules and procedures, so most will have products to meet your requirements and you will usually be able to obtain the necessary ‘mortgage in principle’ without much fuss.
- If you feel you are entering a bidding war with another auction attendee, who seems just as keen as you to buy a particular property – give way and let them have it before you go beyond your pre-assessed bidding limit. Don’t be too determined to win every bid you place, because more often than not, someone may be prepared to pay a much higher price than you. It may be they are less interested in making money from the purchase, because they want the dwelling as their own home – which means they could be prepared to pay above market value, if it helps them buy into the ideal location for them. To help offset the temptation to buy a particular property regardless of cost, go to each auction armed ready to bid for three or four properties (individually). This may involve a substantial amount of pre-auction effort, but it will improve your chances of acquiring an investment at a good price.
- Have everything in place ready to start whatever works might be required, once a property has been bought. After the auction, every day the property stands still and empty will be a day of opportunities lost, so it’s important to get improvements or ‘staging’ works started straight away. The sooner works are started, the sooner the property will be ready for letting or selling.