Property Auction Due Diligence & How Much To Bid

by Property118.com News Team

10:16 AM, 4th September 2011
About 9 years ago

Property Auction Due Diligence & How Much To Bid

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Property Auction Due Diligence & How Much To Bid
Mark Alexander, founder of Property118.com

Mark Alexander founder of Property118.com

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.

Sell or hold following refurbishment?

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.

My Number Crunching Tools for Property Refurbishment

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.

By all means link to this page or share it using the Share buttons below.  Please don’t copy and paste it onto your own website or blog though, otherwise the search engines might penalise you for ‘site scraping’.

 

 


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Comments

11:03 AM, 7th September 2011
About 9 years ago

Dear Mark ,

Thank you for your good article on buying at Auction , very useful and it helps a lot in buying a properties. Well done and wish you all the best with this web site.

6:55 AM, 14th September 2011
About 9 years ago

Exceptionally good article by Mark on the traditional auction method. bidonmyhouse offers a more user friendly bidding service to help less seasoned property buyers avoid the pitfalls and pressure of a physical auction.

Below is a brief comparison of the 2 types of auction service and to many this will be well known, but to those considering using an auction this should be useful.

Traditional Method of Auction;

This is an Unconditional Auction where on acceptance of an offer or on the fall of the hammer the buyer will pay up to a 10% deposit and exchange of contracts is immediate. Both parties are then legally bound to buy and sell. Traditional Auctions are mainly used by the investment market for properties that attract significant interest from professional investors. The residential sector can find it harder to buy through a traditional auction because there is a limited amount of time to put finance in place, meaning most purchases through a traditional auction are generally cash based.

Bidonmyhouse auction service:

Under bidonmyhouse auction service, on acceptance of an offer or the fall of the hammer a buyer will place a low % non-refundable reservation fee. They are then given 28 days to exchange contracts and a further 28 days to complete thereafter.

This type of auction is aimed at residential buyers and sellers. Any serious buyer can buy through our service because there is greater flexibility in terms meaning that the buyers can purchase with finance.

Through our system of auction, more viewings means more offers and typically a higher end sale price than traditional method.

In addition another huge benefit is the seller does not pay any estate agency sales fees.

Whilst the Traditional Auction is useful for disposing of problem and investment stock to the market quickly and efficiently, the residential market requires more than this and bidonmyhouse offers the answer.

bidonmyhouse offers sellers the ability to maximise the level of interest from a broad range of buyers, in turn creating the most achievable sales price in the current market.

Vendors using this method benefit from the security of a non-refundable deposit and a fixed date to move and sell.

We hope this set out a simple comparison of the 2 methods.

15:23 PM, 21st September 2011
About 9 years ago

Mark - thanks for sharing your insights on buying at auction.

It is imperative that people understand just because something looks like a bargain - it may not always be a bargain!

I wrote a blog entry "Be Aware and Beware when buying property at auction" in my blog http://www.whatsamsawtoday.com
http://ow.ly/6AIHm and my blog is littered with real life stories and properties that are going to auction and the concomitant problems they come with them (the latest was a legal squatter in Cambridge).

You can get some good buys at auction, but these are becoming fewer and fewer. There are now a high number of end users buying at auction which has pushed up the prices beyond what many in the trade feel comfortable with.

Buying at auction used to mean buying at a discount - this is no longer the case. On many occasions I have baulked at what somebody has paid in the auction room - BMV is now very hard to find in an auction room.

This means that doing your homework is even more important than ever. Don't ever assume just because it's in auction it's a good price. The best assumption that you can make is that it's in auction - there is a problem. Then spend your time working out what that problem is and how much it's going to cost you to sort it. Only when you have done that can you decide if the property is still worth buying and you can make any money.

You'd be surprised at the amount of people who end up working for free or losing money on developments - but they don't show those on TV most of the time 🙂

Martin Cunningham

10:34 AM, 25th November 2013
About 7 years ago

Mark, an excellent and informative article on buying property at auction. We, at Auction House, the UK's No 1 residential property auctioneers are witnessing an increasing amount of tenanted investment sales. For divesting landlords it makes sense to sell with tenants in situ, reduces void risk and for the buying invester they benefit from rent on day 1.

We have a number of help guides on our website http://www.auctionhouse.uk.net and to view our latest VT....Why do people choose property auctioneer Auction House can be viewed here: http://youtu.be/-SsDEL6Vxbg


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