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.