THE “TRICKS OF THE TRADE” OF THE PROPERTY AUCTION INDUSTRY
FREE PDF Download: Get the Tricks of Buying & Selling at Property Auctions
House Auction Tricks of the Trade
This excerpt is from a chapter in the book, THE TRUTH ABOUT PROPERTY, written by NRLA trainer, Henry Davis, www.henrydavisproperty.com.
I’m a big fan of selling at auctions, but more cautious when it comes to buying at auctions. Buying property at the auction is not for the faint hearted, as, like all financial decisions, there are risks as well as rewards.
This chapter isn’t suggesting the auction isn’t a great place to grab a bargain, but I want to draw your attention to the sharp practice of some of the industry. However, these tricks are not the ‘norm’ as most auction houses are largely honest.
Trying to value an auction lot is a challenge, often because there are vague and minimalistic descriptions and often missing paperwork. This is an industry without full disclosure. The legal pack or other undisclosed issues are sometimes deliberately hidden by the vendor. Another common problem is misdescription; for example, something presented as a larger piece of land or parking space, and realising this is not actually the case after closer legal attention.
In terms of current trends, the biggest for many unsuspecting buyers is fees, or extra fees, on top of hammer price. These are often discovered to the surprise of many buyers, after purchase, because they simply do little or no due diligence and because some auctions don’t exactly make it easy to find or understand the fee information.
So, why are auctions risky? And how do you reduce your overall risk? The best way to reduce your risk at auction is to allow yourself as much time as possible to do your research. You should have enough time to complete better due diligence and bring in the right professionals where needed so you are not on the back foot all the time, i.e., pushed into making rushed decisions without all the information at your fingertips.
Starting your due diligence ahead of the competition decreases your risk and helps level the playing field. More time means better due diligence. Buying right at the auctions, means you need to accurately value a property, but with Land Registry data being three to four months out of date, you might ask how this can be achieved. The answer is you need all recent auction sales price data, and even though this information is available, it is hidden behind a paywall.
The auction house understandably wants to instil a sense of urgency and with the hope of a bargain, push buyers into making fast decisions on the premise of finding a great deal and that elusive bargain. The event and atmosphere are unlike any other: pushing our sense of rationality and inherent (normal) caution away with the wind as we get emotionally involved and drawn into FOMO.
The auctioneer wants a successful event by creating sales hype to draw us into the ‘Fear of Missing Out’ (FOMO) with low and sometimes misleading guide prices. This is all part of the additional hype with sales suggesting previous successful auctions were 70-80% sold. This misconception isn’t so accurate, as this figure doesn’t take into account withdrawn lots, often withdrawn because of lack of interest. There is also a common misconception that property sells for crazy prices, and most of the time they do. But, that’s not the true story of guide prices. What is really happening is that lots get offered with crazy guide prices in order to draw buyers into bidding in the hope of finding a bargain.
All this leads me back to understanding what levels of due diligence are really needed. When I look at an auction lot, I have a few fundamental questions I need to answer before I can honestly say that I completed a reasonable standard of due diligence. The fundamental problem will be trying to work out if you have, in fact, purchased a bargain, and unfortunately, it’s common for many to realise this after completion, rather than before.
Given the obvious, but not insurmountable challenges, you need a clear idea in your mind as to what the most important queries or questions you need answered are, which might enable you to at least try to level the completely unlevel auction casino playing field.
In order to do this, you need the most up-to-date information and specific auction sales history data. I do my comparables based on auction sales data as well as generally available non-auction sales price data. And a valuable source to this information is a paid subscription to EIG Auction Data, which will give you access to the latest general sales prices and previous auction entry only figures.
This source is the only weekly updated sales market history tracking information, unlike the Land Registry. These figures are updated every time there is an auction and it is the only place where you will be able to ascertain recent price details. In addition, it shows you how many times a property has previously been through a UK auction. It shows current sold prices without having to wait three or four months for the information to be updated on the Land Registry. EIG gives historic sales entry and price data also. I have no affiliation with EIG whatsoever, but it is an invaluable resource if you want more accurate valuation information.
Below is an example of the main questions you should consider asking:
- Is there anything in the title or special conditions stopping it from being bridgeable now and mortgageable later, and what are the likely costs to resolve these issues?
- What are the reasons why it has been entered into the auction? And is it one of the 30% of properties which have already been through the auction? (EIG Data is the only source to find this information.)
- If there is a tenant in situ, have they signed the appropriate contracts, and if not, am I likely to secure vacant possession in future with the tenants’ agreement?
- Assuming it’s a refurbishment project, how soon can I get my Quantity Surveyor and Structural Engineer to assess?
- Are there any legal restrictions for developing the property, or, if it’s land, are there any overage clauses
This chapter, “Auctions Tricks of the Trade,” is from Henry’s bestselling property book and the ultimate guide for anyone buying or selling at a property auction.
Henry is the CEO of We Buy Any House and Genii Developments Ltd and a developer for over 32 years. He is also an accredited Property trainer for the National Residential Landlords Association.
Copyright, Henry Davis. www.henrydavisproperty.com