Keep cool in the heat of an auction and bag a bargain

There can be good deals, if you're well prepared

The auction rooms are again abuzz with activity, with the industry monitor the Essential Information Group reporting a 12 per cent year-on-year increase in the number of lots coming under the hammer. Normally busy auction rooms are a sign of ill times in the property market – desperate sellers and bargain-hungry cash buyers meeting. This time around, though, the story is more complex.

"There is an element of north-south divide about the auction rooms," says Philip Selway, a managing partner at The Buying solution, the property buying advisory arm of estate agent Knight Frank.

"In the south and London in particular along with the usual distressed stock there are quite a few lots which are coming to auction as a way to get multiple buyers in one room and drive up the price. In the rest of the UK, though, there are more distressed sellers who are looking to sell quickly before foreclosure or they could be local authority or housing association sellers."

Nevertheless, traditionally, auction is seen as a way to pick up a bargain, even in London and the south-east, either to be renovated into a home for you to live in, rented out in what is a buoyant rental market or sold on at, hopefully, a profit. Whatever the big idea, the numbers have to crunch correctly.

"The maths is pretty straightforward," says James Greenwood, the managing director of stacks property search. "If you are planning to rent out, first work out what you are likely to have to pay for the property and get quotes for the amount of work that needs doing. A friendly builder should help here.

"With this figure calculate what rental a property like yours can achieve in its local market, allowing for a month or two a year left vacant, divide the spend by the rental and you have a prospective yield. Generally, a yield of 5 per cent or above works for most. Below this and it becomes a very marginal investment," he adds.

"If you're buying to sell on, the maths are simpler still. Just calculate the cost of the renovations, subtract this from what similar properties are fetching locally, add all the likely loan interest, transaction and other costs, as well as a decent profit and this should leave you with a budget to spend in the auction room," Mr Greenwood says.

Most buyers in the auction room are either professional investors with a substantial number of properties or renovations under their belt or the new breed of property-buying adviser. For a fee, buying advisers will look at planning applications in the local area, any neighbour disputes and work out your yield in advance and take advice in terms of what work needs doing: "Never go into an auction blind. I don't understand people who buy property at auction unseen. You are opening yourself up to massive risks," Mr Selway says.

It's pretty simple to do your own due diligence on a property but it does mean upfront costs. "The most important single thing is to get a survey done. Don't scrimp on this. The cost of the survey is between a quarter and 1 per cent of the value of the property and that is a valuable insurance against the potential costs of the property if it proves to be a lemon," Mr Greenwood says.

It's crucial to know what you're buying for a very good reason. Once the hammer goes down on a bid the buyer has entered a legally binding contract to buy, no matter what condition the property is in. a 10 per cent deposit is payable immediately and the balance has to be paid with 28 days.

Playing with such high stakes, following auction room etiquette is important."Stay in control. Have a top price you will pay and don't exceed it," says Mr Selway.

"Make all bids clear to the auctioneer and if you are with someone, a spouse or agent for instance, make sure that only one of you gives the signal. You don't want to be bidding against each other by accident."

As the auction hots up Mr Greenwood recommends taking control: "Auctioneers are there to achieve the best price, so they will move up in as high increments as possible. If you are not happy moving up to the next five or ten grand point then tell the auctioneer a different price, one that should slow things down a little.

"Remember, there are always other lots and another day. Losing the money on a survey or preparation work is nowhere near as damaging as significantly overpaying for a property or exceeding your budget to such an extent that you will find it difficult to raise the finance to do the work necessary to bring it up to scratch to either sell on or rent out."

Financing an auction property purchase has become a real challenge since the chill wind of the financial crisis blew through the mortgage market. However, there are finance options for those who can't cash buy.

"Those buying to develop or buy to let often look at bridging finance initially as it tends to be easier to get," says Andrew Montlake, a director of mortgage brokerage Coreco. "Standard mortgage lenders don't nowadays tend to lend on properties at auction. They are often not in the right condition and it's difficult to truly assess value."

Bridging loans are usually short-term, around six months is typical, but cost about three times as much as a standard mortgage in interest.

"As a ballpark figure you are looking at 1 per cent interest a month and charges of between 1 and 2 per cent of the amount borrowed," adds Mr Montlake. "What borrowers look to do is develop the property either for sale or letting and then after six months apply for a standard mortgage on a buy-to-let basis or simply sell the home on."

The bridging loan industry, though, has developed a questionable reputation and Mr Montlake says taking an independent broker's advice is key. Bridging is not the only option. If you have spare equity in your home and are looking to strike out in buy-to-let or buy a second home at auction there may be the option to remortgage, but be aware that lending criteria are strict, charges apply and your main home will be at risk if you can't keep up repayments.

However you choose to finance your purchase, the message is not to let the buzz of the auction rooms carry you away. "These are exciting places where you find the true value of property but they are not for the underprepared or the faint hearted," says Gary Murphy from auctioneers Allsops.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Sport
Super BowlAfter Katy Perry madness it's back to The Independent's live coverage of Super Bowl 49!
News
See what Twitter had to say about the first half of the Super Bowl
News
people
News
people
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    The super-rich now live in their own Elysium - they breathe better air, and eat better food, when they're not making beans on toast for their kids

    The super-rich now live in their own Elysium

    They breathe better air, eat better food, take better medicine
    A generation of dropouts failed by colleges

    Dropout generation failed by colleges

    £800m a year wasted on students who quit courses before they graduate
    Entering civilian life 'can be like going into the jungle' for returning soldiers

    Homeless Veterans appeal

    Entering civilian life can be like going into the jungle
    Sam Taylor-Johnson: Woman on top

    Sam Taylor-Johnson: Woman on top

    Fifty Shades of Grey director on bringing the hit to the screen
    Shazam! Story of the $1bn 'what's that song?' app

    Shazam: Story of the $1bn 'what's that song?' app

    As in 1942, Germany must show restraint over Greece

    As in 1942, Germany must show restraint over Greece

    Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
    Britain's widening poverty gap should be causing outrage at the start of the election campaign

    The short stroll that should be our walk of shame

    Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
    Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

    Homeless Veterans appeal

    The rise of the working poor: when having a job cannot prevent poverty
    Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

    Prince Charles the saviour of the nation?

    A new book highlights concerns about how political he will be when he eventually becomes king
    How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

    How books can defeat Isis

    Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
    Judith Hackitt: The myths of elf 'n' safety

    Judith Hackitt: The myths of elf 'n' safety

    She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
    The open loathing between Barack Obama and Benjamin Netanyahu just got worse

    The open loathing between Obama and Netanyahu just got worse

    The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
    French chefs get 'le huff' as nation slips down global cuisine rankings

    French chefs get 'le huff' as nation slips down global cuisine rankings

    Fury at British best restaurants survey sees French magazine produce a rival list
    Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

    Young carers to make dance debut

    What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
    Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

    Design Council's 70th anniversary

    Four of the most intriguing prototypes from Ones to Watch