Property Auction Due Diligence & How Much To BidMake Text Bigger
I have purchased some of my best property deals at auctions but it is not for the faint hearted.
When buying at an auction these are the major considerations:
- Why wasn’t the property sold by an estate agent? They are usually marketed by an estate agent before they get to auction!
- Is there a problem with the title? You can either pay a solicitor to check this or you can pay a solicitor to teach you what to look for in the auction pack. I’ve found the latter to be a more cost effective option.
- How much will you need to spend on the property? I always get them checked over by an experienced builder who is able to spot any structural defects and can give me a guide price to refurbish the property to my specifications.
Obvious due diligence?
The above might all sound pretty obvious stuff but I am constantly amazed at how few people actually do this.
Let’s paint a mental picture of a property that’s coming up in an auction that takes your fancy. My rule of thumb is that the property will typically sell for 10% to 20% over guide price. I may be looking to rent the property out and there are a number of financial calculations to consider the viability of that. However, my starting point is can I make money on this deal if I buy, refurbish and sell within 6 months. To answer this question I need to know the following:
- How much are properties like this actually selling for when fully modernised in the open market?
- What is the typical sale period for properties like this?
I then work backwards.
Calculating the bid price for your auction property
Let’s say the property will be worth £165,000 and should sell within 6 months of refurbishment. Then lets assume it will take a month to refurbish and will cost £25,000. I then calculate acquisition costs including legal fees and also agents and legal fees for selling it on, let’s call that £5,000. If I’m borrowing to finance the property I also need to factor in interest, arrangement fees, exit fees and valuations. In this example let’s assume we are doing the deal for cash.
Based on the above I now know that I need to buy the property for no more than £135,000 before I make a penny for my efforts if I decide to sell it.
So my question is, how much would you bid for this property?
My own general rule of thumb is that I want to make at least £30,000 for my efforts so I might bid up to £105,000 so long as I’m certain about all of my due diligence. Chances are though, I will want to get the property for less than that to allow for slippage in time and if cost over runs. Things that might put me off bidding are:
- Comparable properties in the area not selling within a typical 6 month period. I can establish these facts without ever seeing the property by checking websites such as Mouse Price, Rightmove (sold prices) and Property Snake.
- Title problems. Resolving a problem such as a bankrupt freeholder on a leasehold property typically takes 18 months to resolve. It can take a lot longer. I can read this type of information in the auction pack.
The above criteria typically involves reviewing up to 150 properties and viewing and bidding on 30. As a full time job this results in the ability to complete 12 deals per annum, subject of course to funding.
I prefer to do deals that I can hold though as I’m 43 years old and my property portfolio is my pension. To review my criteria on whether to sell or to hold please click here.
I have developed a Number Crunching tool which I share freely, click here for details.
Any questions or comments on this property investment strategy?
I hope you have found this useful and please feel free to ask a question or leave a comment in the comments section below.
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