Property auctions hold a unique and special place in the minds of many would-be landlords and property investors. Popularised by shows such as “Under The Hammer”, many people conceive property auctions as intimidating bull-pens where fortunes are won and lost in mere moments.
Whilst the truth may be somewhat less glamorous, property auctions do offer landlords and investors the opportunity to purchase properties at a potentially below-market value (BMV) price. A factor which makes them particularly attractive to seasoned investors and people looking to cut their teeth in the property market for the first time.
The challenge with property auctions is that they are not for the faint-hearted. Unlike traditional methods of property transactions, property auctions try to create a more transparent and efficient process that brings buyers and sellers together in a competitive and fast-paced environment. In theory, this creates the opportunity for sellers to quickly dispose of sometimes challenging or unusual properties, whilst buyers can snap up undervalued assets. However, in practice, the fast-paced and time-consuming nature of property auctions can lead to emotion-driven over-bidding and buyer’s-remorse.
Given the nature of the buyers and sellers who tend to utilise auctions, there can be a huge variation in the types of listings available. Auctions can include typical residential homes, commercial buildings, vacant land, buy-to-lets with tenants in situ and any host of other weird and wonderful properties. The lots themselves can be sold by anyone from individuals, financial institutions or even local authorities. Auctions are common meeting grounds for probates, repossessions and absentee owners.
Due to the nature of the properties listed, the buyers present and the environment of the sale, auctions can be especially daunting for the uninitiated – and rightly so. However, by approaching auctions with a reasoned and well-researched mindset, new initiates can equip themselves with the tools needed to succeed. The first step to doing this is to understand exactly what auctions entail.
The Advantages of Buying at Auction
There are considerable benefits and risks associated with buying a property at auction, some of which have already been touched upon. Whilst complex relative to a conventional property sale, auctions can offer huge rewards to those willing to invest the time into properly understanding them. Some of the key benefits of auctions include:
Speed Of Sale
Auction transactions often involved motivated or distressed sellers. They want to sell the property and receive payment into their account as quickly as possible. As a result, auction sales often move on an expedited timeline, with completion usually required within 28 days. This can be beneficial for investors seeking to purchase properties without wanting to be tied up in multi-month processes and chains.
Below Market Value Prices
As auctions involve motivated sellers, there is more opportunity for buyers to purchase properties at a steep discount from their true market value. Probate and repossession sellers are more concerned about generating a minimum sale price quickly, than maximising the selling price of their properties.
One of the more unique appeals of auctions is the type of listings they attract. Alongside more conventional properties being sold by unconventional buyers, it is possible to encounter less-vanilla opportunities. This could include anything from commercial units, through to refurbishment investments and land development plots. Attending auctions can open up buyers to a world of new investment opportunities.
The challenge with purchasing investment properties through more conventional channels is that you can often be up against non-professional homebuyers. Your competition includes first-time buyers and families who are happy to pay over the odds for properties which meet their requirements, even if the prices they pay are unpalatable from an investment perspective. Whilst this can still be the case in property auctions, it tends to be more dominated by professional buyers seeking investment opportunities. As such, rational fair value prices are less likely to be gazumped by irrational overvalued ones.
The Disadvantages of Buying at Auction
Without doubt, property auctions provide an enticing landscape for entrepreneurial investors seeking to maximise their returns. However, they are not without their downsides. Auctions are inherently more complex processes than conventional sales, requiring more due diligence and research. As such, it is common to run afoul of the Winners Curse. The elation of purchasing a property can soon be erased by the reality that you have overpaid or misunderstood vital information. Some of the key risks include:
The Emotional Premium
Auctions are emotional rollercoasters by design. Auction houses and auctioneers are incentivised to instil a sense of urgency in the process. They want to induce a fear of missing out (FOMO) amongst buyers, so to achieve the best possible price for sellers. As such, inexperienced buyers can find themselves caught in bidding wars and emotionally drawn into paying more than they originally budgeted for in the heat of the moment.
There is often a reason sellers opt to list their properties at auction rather than pricing them competitively on the conventional market. Many sales include specialist considerations and requirements beyond the appetite of a conventional buyer. Properties may be uninhabitable, or unique in their nature. More commonly, they can have restrictive or problematic covenants or title deeds which can inhibit sales. Without proper experience or guidance, such properties can be a minefield for first time auction attendees.
Much as auctions bring the benefit of filtering out some of the less rational homebuyer premiums, this can be a double-edged sword. It can mean that new attendees are often up against seasoned investors who have more experience than they. As such, beating off stiff competition to purchase a property may be an indication that you have paid more than many other experienced investors would have for the same opportunity.
The Key to Success at Property Auctions
Yes, property auctions can be complex and risky processes, but everyone has to start somewhere. Seasoned property experts were once wide-eyed novices. The challenge is understanding the core fundamentals of an effective and profitable property auction strategy: time, research, guidance, and discipline.
Property is a competitive landscape and the difference between untold riches and gut-wrenching disaster is not as far away as many would have you believe. You can tangibly influence your likelihood of success by investing sufficient time into the process of buying a property at an auction. Whilst the eventual selling price and sale can be determined in a matter of minutes, the real success of property auctions is determined by the time you invest prior to the auction. You need to be willing to spend time truly understanding the property you wish to bid on. Make sure you are one of the first people to download the legal pack and you have conducted sufficient due diligence on the property. It is worth conducting multiple viewings, including at different times of day to get a feel for both the property and its location. By investing the time needed to thoroughly understand all the individual elements of the sale, you can mitigate the risk of being put on the back foot or being rushed into an ill-thought-out decision.
Once you have accepted investing in property auctions requires time to be successful, it is important to consider the depth of research needed. Property auctions often entail complex and unique properties which don’t fall within conventional models. It is imperative that you conduct sufficient research and due diligence such that you know exactly what you are purchasing and how much it is worth. The superficial value of a property can be visible for all to see, but the true cost may be lurking within subsiding walls or complex covenants. You should be prepared to research anything and everything in relation to the sale.
It is a fallacy to believe that the best investors operate in isolation. There are few people out there who understand all the minutiae surrounding structural engineering, property law, project management and investment. The best buyers utilise a team of experienced experts and rely upon their guidance to routinely make the right decisions. As you engage in auctions, it is essential to build out a team of trusted structural engineers, quantity surveyors and solicitors to help guide and inform you. Don’t be afraid to invest in their guidance before the auction, to prevent you from making a costly mistake.
Finally, all successful property investors at auctions are disciplined. They rely on a keen emotional intelligence and pragmatism to detach themselves from the excitement of the day. The atmosphere of an auction house is unlike traditional home purchases. You are surrounded by like-minded buyers and professionals with the intention of purchasing a property. You have prepared for the moment, investing time and effort into researching your chosen lot. You may have already spent hundreds on third party guidance. But the best property investors know that despite this, the best decision can often be to walk away rather than overbidding for the fear of missing out.
Before you commit to purchasing a property at auction, it can be worth attending a number of local auctions as play-throughs. You can go through the listings, highlight the ones of interest and view them yourself. Work out what you feel fair value is and make your own estimates of the costs associated with the property. Highlight any risky covenants or discrepancies. Once you have done this, you can test your assumptions against what other buyers eventually pay for the property.
Working out the Value of a Property
At its core, you attend auctions to purchase properties at attractive prices. Hopefully at values which are significantly below their fair market rate. But to do this, you first need to work out what you consider to be the properties fair market value. The first step to doing this is considering comparable properties. You can access historic sale prices on the land registry, however, this data is often 6 or more months out of date, so will not give you a true reflection of up-to-date sale prices. It can also be worth looking at sale prices on Rightmove, which often include the sales particulars and additional information about the state of comparable properties. Otherwise, you can lean on professional solutions like EIG Auctions (Essential Information Group) where you can sign up to find more detailed information.
You should find at least two sets of comparable selling prices. The first set can compare similar like for like properties in a similar condition to the one listed. You can check the auction particulars or sale particulars on EIG or Rightmove respectively to determine the condition of the comparable properties. The next set should consider the attainable value when done up – if required. How much do similar properties in the ideal scenario fetch and how much work would be required to bring your property up to scratch.
Once you have settled on what you believe to be the true market value of the property, you can begin to work back from this to determine what you are happy to pay for the auction lot. Remember to include a fair percentage discount for the risk premium of purchasing a property at auction. Equally, you should consider whether there are any other auction house or seller related fees which are also worth taking into account when determining what price you feel you can bid.
Doing Your Due Diligence
Once you have derived a fair market price for the listing and compared it against the reserve price of the property, you can start to begin your due diligence on the property. Due diligence should take multiple different forms, entailing everything from site visits, through to checking the documentation associated with the property.
The first form of due diligence undertaken should be a general analysis of the information available on the property. You are looking for the easy wins that you may have missed. It is better to find any deal breaking issues early, before incurring the time and fuel cost of viewing the property in person. You should consider checking the following:
- Check if there are any outstanding planning applications on the local authority website. In some cases, there may already be value-add planning permission present. Equally, there may be evidence of improperly filed planning applications which could cause issues further down the line.
- You should also use Google Maps as a satellite view to check for evidence of extensions or amendments of the property which fall outside of any planning applications or permitted development.
- It is always worth calling local agents to sense check your fair market valuation and learn more about the area. Ask them what they would value similar properties at and if there is anything they would recommend considering.
- Check to see if the property is in an Article 4 area. Such areas can have severe restrictions on permitted developments and homeowner activities which can hinder the value of the property.
- Check the property’s history across multiple search engines and sales site. Such searches can help to highlight everything from highlighting sites with historic listing details, through to newspaper articles about previous crimes committed in the house.
- Conduct checks to determine whether or not the property is a listed property.
- If the property is a leasehold, investigate the length of the lease if available.
Once you are confident that you have conducted the basic necessary due diligence checks, it is worth getting on the road and viewing the property yourself. Without fail, you should always try to view the property on your own before a formal viewing. Try to pick a time or date which is outside of normal viewing hours, so you can get a feel for the local area and street. Take the time to speak to any neighbours and ascertain their thoughts on the property and the neighbourhood. Equally, if there is a tenant in the property and you catch them at the right time, ask them about their plans and experience.
Following on from your initial viewing, you should arrange for a formal viewing of the property. This is where a detailed eye really counts. You should take a high-resolution camera and tape measure with you to site to make sure you are properly equipped. It is important to take multiple photos of every room in the property, including key areas of interest or concern. These can be referred back to at a later date or sent on to professionals for further guidance.
When viewing the property, you should check for the following:
The Structural Integrity of The Property
Look for evidence of bulging or cracks in the walls. Larger cracks or subsidence should be a cause for concern and will need to be checked by a professional structural engineer. If the property is found to have structural flaws, it could be both unmortgage-able and exceedingly expensive to rectify.
The Property’s Heating System
It is always worth checking the properties heating system. Determine whether the property is all electric, gas powered or oil powered. You should also check the age of the boiler and the condition of the radiators and piping to understand whether the house needs a completely new heating system or a new boiler.
The Condition of The Roof
Take time to study the roof. Look for evidence of bowing in its structure or damage to tiles or gullies. You should take photos of every angle of the roof, with a high-definition camera which will enable you to zoom in on specific details. Take special care and consideration when dormer or mezzanine windows are present.
Evidence of Damp or Mould
Damp and mould can be time consuming and difficult to rectify. Look for evidence of mould in every room of the property. Make sure to check behind furniture and difficult items which may be placed to hide evidence of damp or mould.
Signs of Uneven or Cracked Floors
Uneven floors can be one of the more expensive problems to rectify. It is worth checking the floors and determining whether there is evidence of cracks or pooling. If so, consider whether it is the sub floor which is damaged or merely the cheaper flooring or carpet on top.
Insulation & Double Glazing
Make note of the property’s insulation credentials. Is there evidence of loft or cavity wall insulation? Is the property double-glazed?
The Condition of The Gardens
Gardens can hide all manner of problem causing paraphernalia. Most importantly, you should check for evidence of Japanese Knotweed, which can be hugely problematic. But you should also take time to consider whether messy gardens may be hiding deeper problems or vermin.
If you do find evidence of anything of concern, do not shy away from seeking advice. It is important to leverage the experience of experts to inform your position and allow you to determine the appropriate value of the property you are about to bid on. You should send the photos you have taken on to the professional and book in a follow-on viewing to investigate any issues in the presence of an expert.
The Legal Pack
An auction legal pack, also known as an auction pack or legal documentation pack, is a collection of important documents related to the property being sold at auction. The purpose of the pack is to provide potential buyers with the necessary information to make an informed decision about bidding on the property. It allows buyers to assess the property’s legal status, potential risks, and any issues that may affect its value or usability.
Legal packs are compiled by the seller or their solicitor in advance of the auction. It is critical that you take the time to read, analyse and understand the contents of the legal pack on any properties you wish to bid for. Where necessary, it is important to engage the services of your own solicitor to double check and advise on the content of the packs. This is especially pertinent as legal packs can often have significant omittances and inaccuracies which should be reviewed pre-sale. Not only that, but some legal packs may not be provided until the last minute before an auction.
The auction legal pack contains various documents that provide essential information about the property, its legal status, and any potential issues that buyers should be aware of. The contents of the legal pack can vary significantly depending on both the nature of the property listed and its seller, but they usually include the following:
- Title Deeds
These documents prove the ownership of the property and provide details about any restrictions, rights of way, or covenants that may affect it.
- Local Authority Search
This search report provides information about planning permissions, building regulations, environmental issues, and any other relevant information held by the local authority.
- Land Registry Documents
These documents confirm the property’s registration with the Land Registry and provide details of any registered charges or encumbrances.
- Special Conditions of Sale
This document outlines any specific conditions or terms that apply to the sale of the property. It may include information about deposits, completion dates, or other contractual obligations.
- Leasehold Information (if applicable)
If the property is leasehold, the legal pack will include a copy of the lease agreement, service charge information, ground rent details, and any other relevant lease-related documents.
- Property Survey Reports
In some cases, the legal pack may include survey reports or other assessments of the property’s condition or structural integrity.
- Energy Performance Certificate (EPC)
This document provides information about the property’s energy efficiency rating and is required by law in many jurisdictions.
Due Diligence on The Legal Pack
Reviewing legal packs certainly isn’t one of the more riveting parts of an auction purchase. But it is perhaps one of the most important steps. There can often be vital information hidden within legal packs, which can significantly alter the value of the property you are considering. When reviewing a legal pack, it is important to check for the following:
Legal Boundary Variations
It is always worth re-checking the legal boundaries on the title to see if they match the boundaries shown on the title document within the legal pack. Any inconsistencies can prove problematic and time consuming to rectify.
You should check for any potentially restrictive covenants which may hamper your plans for the property. Some legal packs can contain covenants restricting external alterations or specifying access rights, which can inhibit extensions or amendments to the property. More specifically, there can be covenants preventing the conversion of a property into a HMO or restricting the age of residents to a minimum age, as is the case in retirement complexes.
It is imperative that you check the legal pack for any evidence of overage clauses. Such clauses allow sellers to demand additional payments from buyers in certain circumstances and can be extremely cost prohibitive.
Where a tenant is in situ, it is vital that you check that there is a compliant tenancy agreement in place. Without a tenancy agreement in place, it can be extremely difficult to evict tenants or claim possession of the property. Equally, the lack of an active tenancy agreement can make a property both unmortgage-able and unbridgeable.
In addition to the purchase price of a property, buyers participating in property auctions may be subject to various fees imposed by the auction house. These fees can vary depending on the auction house and the specific terms of the auction, but can include buyers premiums, administration fees, sellers legal fees, internet bidding fees and more.
As a buyer, you can be liable for any unpaid ground rent, service charge or dispute fees. It is important to review the documentation and liaise with the management company to ensure that you are not held liable for fees incurred by the seller.
Generally, legal packs for auctions tend to be more limited and restricted than the documentation which would be reviewed as part of a more conventional sale. Where further information is required, it can often be difficult to get a response from the sellers’ solicitors, as are they are under no legal obligation to reply to queries. What is more, in the legal pack it is common for there to be separate special conditions relating to each property in the sale, called the ‘The Special Conditions’ or ‘The addendum’. These can often be released or updated at the very last minute on the day of the auction.
Where the property being auctioned is a leasehold property, buyers should be conscious of an additional layer of due diligence and documentation which should be checked prior to bidding. Some examples of leasehold specific issues are:
- No Management Company
Some older flat conversions will have no management company in place, which can prove problematic for some lenders and restrict your access to finance on the deal.
- Building Management
You should always check whether there are any major works planned for the building. If there are works planned, it is worth checking whether the sinking fund for the management company is sufficient to cover the cost of the work. If not, there is the potential for service charges to rise exponentially.
- Lending Restrictions
It is important to consider whether there are any unique attributes to the property which can inhibit its access to finance. For example, many lenders are reluctant to lend on flats situated above food outlets.
- Outstanding Lease
Many lenders will refrain from lending on properties where the lease has less than 75 years remaining. This can be especially problematic as you are required to have owned the property for more than 2 years before you can apply for a lease extension.