If you have an interest in the property market you will almost certainly be aware of the hype around Property Auction Bargains.
But, as with all hype, separating fact and fiction is critical in painting an accurate picture. Furthermore the hype has increased awareness which in turn competition at auction which, to some degree, has reduced the likelihood of getting a bargain.
This article is aimed at novice and infrequent Property Auction buyers.
What is a Property Auction Bargain?
Sounds like an obvious question doesn’t it but identifying exactly what constitutes a bargain is more complicated than it initially appears.
Let us suppose you are buying a property to rent out. In this case there is little point in assessing its bargain status on the back of a notional valuation derived though some process after you have completed. It would be an over simplification to simply deduct the price paid from a notional valuation for sale through normal marketing channels.
In this example it would make more sense to consider whether the property was a bargain based on the yield on the amount invested i.e. price paid, any fees and renovation for rental costs.
Of course if you are buying to sell then you must factor in the fully loaded purchase price, legal, survey, financial and auction fees, any renovation costs, selling fees, tax on profits and of course interest charges or lost interest in tying cash up in the property. Then of course there is your time to consider - what do you value that at?
Also most auction buyers usually consider bidding or actually bid on a number of properties before winning one. It is absolutely essential that potential buyers get a Home Buyers Survey and Solicitor Pre Auction Report (SPAR) before biding. To neglect this could leave you the proud owner of an expensive structural or legal mess. It is therefore necessary to factor in the cost of a few additional surveys and SPAR's to the overall cost also.
Remember also that a Home Buyer Report includes a Property Valuation which you will need in order to know what to bid and how to assess a potential bargain. Not only that but a SPAR will tell you critical legal issues that could have a pronounced impact on the valuation of the property.
NB. There are a number of techniques that can be employed to assess the property valuation. However as this article is aimed at novice buyers, we advocate that the value is assessed as part of a RICS HomeBuyer Report (can cost sub £200) which includes a formal property valuation prepared by a qualified Chartered Surveyor.
Despite all of these additional costs, it is still possible to get a fantastic Bargain at a Property Auction. It is therefore necessary to understand the motives behind typical sellers at auction.
Why do people sell at auction, why not sell through an agent?
The answer is that their motivations are other than or additional to getting the absolute best price for the property. The most well known type of Property Auction Bargain is the repossessed property. (see: Repossessed Property Auction – a critical guide for buyers)
In this case it will not be the former homeowner doing the selling. Instead it is the lender who will be looking to recoup their equity (i.e. the amount of the loan). What’s more they will be looking to recover their loan as quickly as possible and they may even have a job lot of properties to 'shift'. This means lenders can be more ‘realistic’ with reserves and, compared to agency prices, reserves may be low.
Public bodies such as Housing Associations or local authorities also sell lots at auction and they too are not emotionally attached or financially dependent (to the same degree) on the property they are selling.
Companies also sell properties at auction and they often chose to dispose of capital assets when the company requires an injection of cash.
Properties are often disposed of during the administration process of failed companies. Typically administrators have to balance the need to dispose of assets quickly with obtaining the highest return.
Probate properties are also common at auction and they are often in need of modernisation. As such they can represent a potential Property Auction Bargains as properties in need of updating often give a good return due to the hassle factor.
Properties are often sold as part of the probate process by the executor of a will. Often these properties are sold at auction as a tax liability falls on the beneficiaries and often the property is sold to meet this. Furthermore beneficiaries are usually looking to achieve a relatively quick sale.
So bagging a property Auction Bargain is easy?
All you need to do is get a valuation and then bid below that value on the type of property mentioned above? Well actually it is much harder than it sounds. Don’t forget that auctions are full of developers, portfolio owners and regular professional dealers. This means that you will be in the presence of serious competition.
Not only that but actually identifying the type of property being sold is complicated. Sometimes for example lenders deliberately attempt to conceal that the property is a repossession.
Often the art is in reading between the lines in the auction catalogue.
More worrying still is the fact that auctions continue to be the favoured route for disposing of property that simply failed to sell via more conventional routes. These properties might be literally unmortgageable or possibly have serious legal or structural problems. They may even be issues with the property’s location for example on a highly desirable street.
There are thousands of auction stories of buyers ending up with a legal complications such as a short lease (that seemed fine during a cursory flick through the legal pack), collapsing property (that looked fine in the pictures) or a property on a street beset with anti social behaviour (that wasn’t apparent on a Google map drive by).
So careful research before bidding is essential or you could end up more victim than bargain winner.
Once you have identified a property to bid on and assessed its value, read our guide on Property Auction Bidding Strategies.
Don't be deterred, Property Auction Bargains are out there
Good luck finding a bargain. Thousand of people do so every month and there is no reason why you cannot join them. What's more, every indication is that the number of properties being auctioned is set to increase in 2012.