Are property auctions for suckers or success?
Romanticised by television programmes, property auctions have become popular with people investing in property. You’d be forgiven for thinking that auctions are a paradise for investors snapping up below market value properties. Stories of auction nightmares are never recapped by presenters of ‘Homes Under the Hammer’. For every auction success story, I’ve heard, I’ve met at least one investor who has been duped into paying over the odds for an expensive and time-consuming project.
Can you pick up below market value properties at auction, or do the risks outweigh the potential rewards? What are the hidden costs associated with property auction success? Are property auctions places where sellers offload money pit properties to unsuspecting buyers? Does bidding at auction guarantee buying below market value properties? Are they the best place to find property investment opportunities?
These questions and more are answered in this article.
Why do properties get sold at auction?
One of the first questions that home buyers ask is, “Why are you selling?”. Many property investors who have been tripped up at auction have never asked this question. There are three main reasons for selling the property at auction:
- It has been repossessed or is about to be.
- The property has been for sale for a long time with multiple estate agents, but it just won’t sell.
- The seller wants a quick sale.
Now, a repossessed property is one thing, but a property for sale that falls into categories 2 or 3 is an entirely different kettle of fish. You must ask yourself why the property has been so difficult to sell:
- Could it be that the area is run down, or the street is plagued with problem neighbours, or there is a lack of shops, schools, transport links, major employers and major investment nearby, making it an unattractive place to live?
- Why is a quick sale so important? Perhaps the seller has run into money or health problems. Or could it be that the seller knows of expensive maintenance and repair issues and is trying to push these onto an unsuspecting buyer?
An absolute bargain – which literally disappeared
If Colin Todd of Renfrewshire had done a little more homework before bidding on a flat in Gourock, he might have saved himself a whole lot of trouble, time and money. He thought he’d snapped up a bargain when he paid £37,500 for a ground floor flat, which was advertised by the auction house as “an interesting development opportunity for a dwelling or holiday property”.
Having paid his deposit on the day of the auction, he was duty-bound to complete within 28 days. As the winning bidder at the auction, Mr Todd was also liable for any damage to the property after agreeing on the purchase. You’ll probably also find a clause in the sale contract that the seller is exempt from any costs associated with the destruction of the property. And this is exactly what happened to Mr Todd’s newly acquired property. Less than a fortnight after the auction, the local council demolished the building because council inspectors had deemed it unsafe with major structural defects.
Not only was Mr Todd liable to pay £37,500 for a property which no longer exists, but as the owner, he was also liable to pay the costs of destruction.
Some mistakes property investors make at auction
Crucially, Mr Todd had made several mistakes at auction. These common mistakes often end up costing big money.
If you are considering buying at auction, always bear in mind the warning ‘caveat emptor’ – buyer beware. Properties sold at auction are ‘sold as seen’. You should have a survey done on the property before you start bidding. Most bidders don’t have this done, as there is no guarantee that the bid will be successful, in which case the cost of the survey is considered as waste. Mr Todd was considering bidding on several properties, so had no surveys done. £500 may have saved him from losses running into tens of thousands.
At an auction, the onus is on the bidder to ensure that property details are accurate. Mr Todd did not ask for a copy of the seller’s report. If he had done so and read it, he would have found it detailed a “bulging gable and twisted façade attributed to long-term subsidence”. The report even recommended that potential bidders should get a structural engineer’s report before bidding.
Mr Todd’s story is a good example of how buying below market value properties at auction can lead to expensive investments that will never give a return on money invested. But it’s not the only mistake property investors make at auction.
The £200,000 auction property investment that became a nightmare money pit
In their search for a suitable property investment opportunity, Mr and Mrs Jones had requested a property auction brochure. In it, they noticed what they thought might be an ideal opportunity. Guide price £180,000 in an area where average property prices were nearer £250,000.
They did a few tours of the neighbourhood where the house was located. It was within walking distance to bars and restaurants, and good shopping amenities were close. From the outside, it looked a fantastic property. They had bought a couple of properties at auction before and made a few thousand on each. They were so convinced by the look of this property that they never looked inside, and, when it came to the auction, they paid more than the £190,000 they had budgeted.
The brochure said some modernising was needed. They were prepared for that. What they weren’t prepared for was the rotten floors, which all needed replacing. Nor were they prepared for drainage issues that had to be tackled. The roof proved to be more like a sieve and needed replacing. Joists and woodwork throughout were either rotten or infested with woodworm. The electrical wiring needed removal and renewal. There was no central heating. At the rear was an extension, stretching the length of the property. It had been built with no foundational work or footers. In one corner, it had sunk by almost a foot.
Mr and Mrs Jones had budgeted £190,000 for the purchase price, and a further £25,000 for repair and modernisation. They had expected the work to take two months and then to flip the property for a healthy profit. During the work on the extension, their builders discovered further subsidisation issues. A year after they bought the property, they were still in the process of repairing it. Their modernisation bill had increased to nearly £100,000.
The Joneses’ strategy of buying below market value properties at auction was in tatters. The mounting losses on this property ate through the profits they had made previously.
Can buying properties at auction be profitable?
I’m not saying that buying below market value properties at auction can’t be profitable, but there are big risks involved. That’s why I don’t do it. If you do buy at auction:
- Be prepared to pay for a property survey, and be prepared to ‘lose’ this money if you don’t win the bid.
- Always have a top price in mind, and never pay more than this.
- Never buy a property that you haven’t viewed personally – auction properties tend to be old and in need of tender loving care.
- Pay for a solicitor to check the legal pack that comes with every property – another expense you may not have considered.
- If you are starting out, get some experience by attending at least one auction as an observer.
- Get your finances lined up. You will need to pay at least a 10% deposit and complete within 28 days.
- Make sure you read the small print and ask for any addendums (even on the day of the auction it is possible for sellers to add an extra clause or three).
- Remember you may also have to pay stamp duty and will have to pay auctioneer’s fees.
Buying at auction is not the easy option. Buying below market value properties at auctions is becoming difficult. There are fewer repossessions today than at any time since 1982, and, thanks to over-bloated investment expectations encouraged by over-optimistic television programmes, there are more buyers at auction chasing fewer properties. Successful investing via property auctions is hard work.
Of course, you could take an easier route to buying in the best places to invest in property UK. Contact one of the Gladfish team today on +44 207 923 6100, and we’ll show you how to buy below market value properties backed by builders’ guarantees at a discount to market value. No unsuspected repairs. No unsuspected costs. Just hassle-free property investment.
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