X

Sign Up

or

By signing up I agree to Property Tribes Terms and Conditions


Already a PT member? Log In

Sign Up

Sign Up With Facebook, Twitter, or Google

or


By signing up, I agree to Property Tribes Terms and Conditions


Already a PT member? Log In

Log In

or


Don't have an account? Sign Up

Forgot Password

To reset your password just enter the email address you registered with and we'll send you a link to access a new password.


Already a PT member? Log In

Don't have an account? Sign Up

  • Auction Tribe

    Buying at auction to sell on

    Hello everyone

    I'm hoping I might be able to get a little advice.

    Briefly, I have some money to invest and after doing lots of research, there seems to be some interesting potential in the city where I live to buy a property needing work at auction (there are regular auctions here every quarter) with the aim of selling it, rather than renting it out. The area I'm looking at is clearly on the up, but is far from there yet.

    Auction purchase price would be in the region of £110k to £130k ( I know this price is only a guide, and it's certainly not guaranteed on the day) with a potential sale price (based on comparables in past 2 months) of £195k to £205k. So, at face value at least, there seems to be a reasonable cushion there in terms of a refurb and profit.

    In terms of finance, there would be no mortgage to organise (so I wouldn't fall prey to the CML 6 month rule), and as far as I can see, my main challenges would be competing with investors (although my expectations of profit may be lower than theirs) to get a good price, and securing a good, reliable contractor to carry out the work. Plus, getting a solicitor to check for any hidden lease horrors etc.

    Am I being realistic about my chances of making this work? Can anyone please tell me what are the key issues I should be aware of, or wary of? My sole aim is to boost my capital in a fairly short time frame. I'm currently renting a house and would stay in this for the meantime so this would be my only property. I'm a newbie in terms of auctions, but have successfully renovated a couple of period houses to live in.

    Thank you for reading!
    0
    0
    Hi Eliza,

    Welcome to Property Tribes.

    Yes, this is one way to boost your capital fairly quickly, but might be quite an ask for a novice.

    Also, the six month rule does not apply to you - the vendor - it applies to the buyer and whether their mortgage company allows them to purchase a property that has not been owned by the vendor for 6 months or more. Smile

    I am not convinced that auctions are the best place for a newbie to buy as they are very competitive and it's easy to get stung. The anagram of auction is "caution".

    Why not source a property through a channel such as Property Tribes RepoList?

    As you are aware, you need to be very clear on your numbers, your timeframes, your builder etc. as margins can easily be eroded if you get something wrong.

    I think you should invest some time in understanding the area and sourcing a suitable property, rather than being pressured to buy through an auction.

    Hope that helps?

    P.s. You may also be interested to learn that some PT members buy retail and sell at auction. Wink

    See also - Quick and easy ways to make money in property

    Food for thought?
    0
    0

    Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **5 reasons to get your FREE portfolio review NOW**
    Hi Vanessa

    Many thanks for your quick response and for the links, I shall take a look through all these. Yes, it's definitely food for thought. I didn't mean that I'd personally be prey to the CML rule though, just that it wouldn't affect my sale down the line as I wouldn't need finance.

    I think auctions do sound quite intimidating for novices - but of course, that's the nature of it. You don't get something for nothing! I'd do my homework in terms of getting the legal pack checked over properly and viewing the property with someone who knows what they're doing beforehand. But yes, I'd be up against experienced developers who've been round the block more times than me.

    For anybody who has bought at an auction to sell on, should I be thinking about any particular golden do-s and don'ts? I'd be really grateful for any tips.

    I'm going to an auction next week so I shall be studying the goings on very carefully!

    Thanks.
    0
    0

    @Eliza
    Rule no.1
    Regard a guide price as pure fiction and come to your own conclusion what it should be. In theory there are guidelines, but ............
    0
    0

    Full time Landlord in WestYorkshire, mentor and property education to new and inexperienced PRS investors. 25+ years of working knowledge. Accredited NLA member & RLA member http://www.landlordgeoff.co.uk [color=#800080]

    Eliza,

    For the first time ever here on PT, I am going to take a completely different tack than Vanessa has taken: nothing personal (and I know she won't mind, in the interest of looking at it from all angles). Here's my take, from the clues you have given (and from my own experience, too):

    If auctions in your 'city' happen only once a quarter, I reckon we are talking about a small, unspectacular city. That's good - less competition, most likely.

    You are very clear about comparables (once brought into resale condition). That indicates to me that you are eyeing up a far from unique kind of property - i.e. you are looking at one for which there is a known, solid market. That's good. It's very important to be clear and confident of your ultimate 'exit' from the deal.

    On the figures you have given, you look to be working on a purchase price of about 60% of what your final selling price is expected to be. It looks to me as though you are likely to have plenty of margin there to cushion yourself with 'if as and when' (think 'when') a pear shape within the adding-value plan starts to appear, once you commit.

    As already advised (by Landlord Geoff) you can ignore the unreliabilty of a 'guide price', and do your own calculations instead. The easiest method I know of for this is to work backwards from a realistic selling price - and deduct from this all relevant cost figures (and your minimum acceptable profit)- i.e. all figures that should in any event legitimately constitute your business plan calculations for this first project .

    Tips:

    Ask a few local letting agents what the rental level (and strength of demand) would be for properties of that type, should you bring one freshly into the letting market in that location. They will instantly know the answer to that question; and in five minute's worth of goodwill time in telling you, they figure they give themselves a high level chance of your coming to them in the future, then bringing them business (or, at the very least, being recommended to others by you as being a thoroughly good egg).

    Ask those same agents for their advice on the best way to convert or do up your intended purchase. They will know exactly what there is most demand for (and why there is such demand). They will also have a good idea of likely refurbishment costs to get to the right standard. They also know the good and bad builders and tradesmen locally, incidentally. They may even offer to have a look at it for you in advance; ánd then advice you quite precisely.

    Exit strategies - think out 'plan A', plan B', and 'plan C'. In other words - cover your bases in advance, in the event that the ideal does not happen (and you come under pressure to find an alternative way out).

    For example:

    1) could you live in the property yourself, if need be?

    2) If you did it up, and then put it into the next available auction -what could you realistically reckon to get for it? Would that allow you to break-even (which may be quite acceptable by way of first purchase experience)? An auctioneer could tell you this!

    3) If there is more than one way to convert the property - how do the numbers look (i.e. cost/benefit analysis) for each way?

    I mentioned experience. Recently, I investigated a property in my home town that was due to be sold at auction two weeks hence. The more I looked into it, the more of a good deal it looked likely to be (many factors; including space, location, planning history and potential, mixed use potential, splitting into capital and rental earning elements, land assembly potential, etc). I also happened to be there when a representaive of the auctioneers was there on an appointment to pick up the keys from an EPC assessor - so I got talking to both. Not only did the EPC assessor give me an instant verbal report (with advised costings for updating); but the man taking the key turned out to be a private property developer who was wanting to start up again after having gone bust in the credit crunch. He could not buy this one himself - but he did tell me the inside story on the sellers positioning with it (which, in a nutshell, was that he wanted to get shot of it and retire, for health reasons, and was not bothered how much it actually fetched).

    I also came on an 'open day' viewing arranged by the auctioneer. I was there first, and left last. Eight different 'interested parties' (usually two or three people in each) came to view. That gave me a good indication or the level of interest, and the kinds of buyers.

    I did not actually obtain this property, because I needed to find a buyer before auction, and was unable to do so. However, I can without doubt say that it sold very cheaply. It was one of those gems, actually, that are well worth looking out for - a property sold by an auctioneer (usually because he is personally known and trusted by the seller) but which lies way outside the auctioneers normal geographical territory.

    So - this short version is quite a long story. Is any of it helpful?

    Brian
    1
    0

    07 42 777 88 79  Property researcher & collaborative sourcing assistant - consultancy & mentorship at times, by request First Finders (residential & commercial land & property: UK, & abroad) Wessex Property Management Services (facilitation & advisory service for property owners) Golden Gate Gardens (specialist garden and landscape design service)

    Hi Eliza

    I'm fairly new to property investing as only been doing it for 2 years, but from the 10 properties I now own, 3 have been from auctions, and albeit it can be daunting, if you have done your homework then this can be a very good way to buy property and make a profit.

    I would suggest that even though your strategy is to buy and sell on, in addition to plan A,B and C, if for any reason it doesn't sell, you should work out the potential rental yields once done up so you have a real back up plan. I realise a 'do up' to sell and a 'do up' to rent have different approaches and budgets but its worth thinking about, you can then always mortgage the property and release the equity that way.

    Work out your maximum price you want to pay and stick to it, when bidding be confident all the way up to that price, also go to the auction with somebody else, who will hopefully stop you getting too carried away.

    Also, if you can get your surveyor to have a look at the property before you go to the auction, they can make you aware of any structural issues with the property so you can factor in all the costs before you bid!

    Good luck.

    Nicola
    0
    0

    Hi Brian

    Wow, what a brilliant reply. Thank you very much for taking the trouble to respond, and in such a detailed way. Very very helpful and much food for thought. Yes, you're right about not relying on the guide price (I've just looked at one recent auction and the sales prices were far higher than the guide quoted in the catalogue, indicates either somebody has paid way too much or they feel very very confident about the market!) and instead, working back the other way from a realistic selling price and deducting costs that way. It does seem that there is a reasonable cushion with an asking price at 60 per cent of the selling price but I'm a bit 'green' on what others find acceptable to be honest - it would be good to know what the average developer would look for as a minimum profit margin on a buy to sell on auction property. 20%? Or less? I suppose it obviously depends on their own costs too, and how confident they are at turning it round quickly....

    Hey ho. Lots to think about. Thanks again.
    0
    0
    Eliza,

    I think that Andrew and Nicola have covered the important points perfectly, to safeguard you. Please don't go looking for an 'average' developer, though! By their very nature, developers think and act independently. They are looking to maximise profit - but they also very thoroughly and carefully minimise risk. I suggest you do the same: if not, do as Vanessa suggested, and go for a more ready-made (probably lower risk) option.

    Just a guide on 'guide price'. It's only purpose, from an auctioneer's perspective, is to generate competitive bidding. It has no logical connection to sale price whatsoever.

    Just a tip on 'maximimum you are prepared to bid'. As Nicola has wisely advised, evaluate this carefully well in advance. However, 'carefully' includes 'accurately'. Most people create ceiling prices in round figures. Suppose, for example, something comes up that you (and competitors, too) think is worth bidding for up to around £100,000. Once the bidding is getting up to within striking distance of that figure, but bidding is getting sluggish, the auctioneer will usually reduce the price increments that he will be looking for from one bid to another - say, from £5,000 jumps to £2,000 jumps (or £1,000 - or even £500 at a time).

    If you keep out of the bidding until it is getting near to £100,000 - you could step in at one step below £100,000, then let a competitor bid £100,000 - and then you come in with £105,000. If to you it is worth £110,000, and you are confident of that figure, you could even shout '£105,000' at the £100,000 point, when the auctioneer is looking to stretch bidders by the odd thousand or five hundred. You will then knock out those cautious bidders - and get it for £5,000 less than you think it is actually worth. I expect you understand my drift, here - be pre-emptive, not a crowd-follower.

    By now, I think you will have received enough good guidelines in this thread to go to that auction this week with confidence. I wish you all the best - and do let us know afterwards how it goes. Shy

    Brian




    (27-07-2015 03:01 PM)Eliza Allen Wrote:  Hi Brian

    Wow, what a brilliant reply. Thank you very much for taking the trouble to respond, and in such a detailed way. Very very helpful and much food for thought. Yes, you're right about not relying on the guide price (I've just looked at one recent auction and the sales prices were far higher than the guide quoted in the catalogue, indicates either somebody has paid way too much or they feel very very confident about the market!) and instead, working back the other way from a realistic selling price and deducting costs that way. It does seem that there is a reasonable cushion with an asking price at 60 per cent of the selling price but I'm a bit 'green' on what others find acceptable to be honest - it would be good to know what the average developer would look for as a minimum profit margin on a buy to sell on auction property. 20%? Or less? I suppose it obviously depends on their own costs too, and how confident they are at turning it round quickly....

    Hey ho. Lots to think about. Thanks again.
    0
    0

    07 42 777 88 79  Property researcher & collaborative sourcing assistant - consultancy & mentorship at times, by request First Finders (residential & commercial land & property: UK, & abroad) Wessex Property Management Services (facilitation & advisory service for property owners) Golden Gate Gardens (specialist garden and landscape design service)

    Hi Eliza - Brian has given you a good detailed response.

    The crucial part of auctions really is understand the risks and have a back up plan. The big risks are things like, lack of planning, building control for works, legal issues, inheriting debts, you think its mortgagable but its not for some reason (disputes etc). Personally i like the properties with issues as I know that often they are easy to quantify and solve, they put others off and often make the largest returns.

    then knowing how to do fairly accurately do due diligence, its crucial to know how much profit you're going to make within a smallest margin of accuracy as possible. It also helps to know how to add of external project costs as well as refurb costs. I know many people that go to buy and auction, fail 3-4 times then give up. Its a numbers game - I research well over 100 properties perhaps bid on 10 and consider myself lucky to pick up 1. When I do buy though, i then know that its very likely my client is going to make a good profit.

    I have clients that I do everything for or those who simply bring me along for moral support, to do extra due diligence for them, sometimes to negotiate the purchase or bid for them too.

    regards Andrew

    location makes a big difference especially on Buy To Sell - London I look to make 20% margin unless its large project when maybe 15-20% is acceptable (net profit after all costs). Needs to be higher in home counties and even higher in other parts of the country (except decent properties in other major cities - same as home counties circa 25% net margin).
    0
    0