Keep cool in the heat of an auction and bag a bargain
There can be good deals, if you're well prepared
Julian Knight is the Money and Property editor for the Independent on Sunday and interim Economics Correspondent, previously he was the personal finance reporter for BBC News and has published seven books.
Sunday 13 May 2012
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.
Mark Dampier: How to get an income now that savings are past the 'use by' date
Thousands of UK investors could lose out following collapse of Secured Energy Bonds
Bargain Hunter: Fly off for a winter break in France or Portugal for well under £100
Millions in line for compensation after being sold unnecessary credit card cover
Weekly Money: Round-up of the personal finance stories you may have missed 26-30 January
- 1 Three-year-old boy shoots pregnant mother and father in New Mexico
- 2 Stephen Fry explains what he would say if he was 'confronted by God'
Stephen Fry explains what he would say if he was 'confronted by God'
The open loathing between Barack Obama and Benjamin Netanyahu just got worse
9 reasons Greece's experiment with the radical left is doomed to failure
President Putin is a dangerous psychopath - reason is not going to work with him
Have we reached 'peak food'? Shortages loom as global production rates slow
Britain's widening poverty gap should be causing outrage at the start of the election campaign
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion