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  • Buy-to-Let

    Pre-auction purchasing - anyone done this?

    Sorry for the pre-emption Amanda - my parents always told me to stop rushing into things. Anyway it sounds like a great blog, I'm looking forward to reading the finished article. This outline has helped point up a few areas I need to get clearer about, and puts the process in a nutshell so many thanks for that.
    I have to say in many ways this approach appeals to me more than a difficult search through arbitrary listings in search of motivated sellers. By definition anyone who puts their property in an auction is motivated so it's a self-selecting sample. That makes good sense to me.
    The other interesting thing I'm starting to suspect about auctions is that, if they're full of investors, then we'll all be working off the same sums, and therefore the selling price should usually be easy enough to predict. On an attractive place without obvious difficulties, it's likely to be the top price at which the numbers stack up. After that it's a question of how closely it fits each person's strategy. Unless someone happens to want it for other reasons and is prepared to pay over the odds because of this e.g. to live in it themselves or house their grandmother.
    Anyway, the discrepancy between auction guide prices and what's being asked for on the open market is quite glaring, so I remain intrigued to see what certain places actually go for. I could be kicking myself in a couple of weeks for not having made more effort, but as a friend of mine says, there's always another one waiting round the corner. Patience is a frustrating business.
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    Bruce Coker said:
    By definition anyone who puts their property in an auction is motivated so it's a self-selecting sample. That makes good sense to me.
    Well expressed. Makes good sense to me too.
    The other interesting thing I'm starting to suspect about auctions is that, if they're full of investors, then we'll all be working off the same sums, and therefore the selling price should usually be easy enough to predict. On an attractive place without obvious difficulties, it's likely to be the top price at which the numbers stack up. After that it's a question of how closely it fits each person's strategy. Unless someone happens to want it for other reasons and is prepared to pay over the odds because of this e.g. to live in it themselves or house their grandmother.
    What I've found is that desirable properties inevitably attract non-investors looking for a home. This makes it's very difficult to out-bid them as they are willing to go that much higher, understandable. (Maybe this suggests looking at less desirable properties or other 'angles'.)
    Also, although investors work off the same numbers their individual criteria may vary enormously. One may look to develop while another might just be interested in an 8% yield.
    Best wishes.
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    Bruce,
    Don’t get hung up with the guide price. In reality it’s just the price the auctioneer thinks will attract interest. An auctioneers tactic is to list something with a ridiculously low guide price (the reserve of course could have been much higher). The idea is that a lot of people will think “that’s cheap” and therefore go to auction thinking they’re going to get a bargain. On the day, so many people bid that it sells for well in excess of the guide (although people set a limit, when they’re actually biding, many people find it difficult to stick to it. They think “just one more” and before they know it they’ve paid a fortune for it).
    I have seen many lots bid far higher than their guide price but still not sell. They fail to reach the reserve (the minimum the vendor will accept). So the guide price should be treated with a huge dose of scepticism.
    Like you, I believe that auctions can be a good place to purchase. Providing you do your due diligence and have your finances in place you can pick up bargains. However, you need to be prepared to go home empty handed rather than overbid to purchase. I’ve recently completed a mentorship programme (?) and was amazed at the people who wouldn’t entertain auctions but would drop thousands of leaflets. Why? The majority of home owners aren’t interested in selling, whereas every auction property is for sale! It might be because of the horror stories you hear about auctions, but I suspect it’s because you can’t do NMD at auction! That’s OK, fewer bidders!
    If you’re looking for a bargain you might be more successful looking at properties with either high or realistic guide prices. Why? Because everyone’s looking for a bargain and most people associate cheap with bargain. Therefore if they see a higher guide price they’re often not interested in it. They don’t follow it up, and few, if any, people bid on the day. Lack of competition means it could sell for a good price.
    If something doesn’t sell at auction, you can make an offer post auction. Auction rules generally still apply but you don’t have to make an offer above the highest bid at auction. Remember, the auction is over and the bidding is now back at zero. It’s sometimes the case that vendors will accept less after the auction than was offered in the room. There are various reasons for this, but I think I’ll save them for my blog!
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    Just to follow up on the guide price discussion we were having before (and your advice not to get too hung up on this is noted Amanda), I crunched the numbers following the results from Allsops auction yesterday, and discovered a few things of interest re guide and selling prices. This might all seem obvious to those who know, but to me it was fascinating...
    Firstly, of 107 lots sold in the auction itself, 67% fetched more than their guide price. Strong evidence, I would say, that guides are designed to attract interest rather than reflect the expected selling price.
    However, the corollary of that 67% figure is that around a third of auction properties fail to or only just meet their guide prices so it's clearly possible to pick up something very cheap.
    Things got even more interesting when I looked at just the low end properties in which I'm interested. Here a slightly higher proportion (35%) failed to make or just made the guide, while the average amount by which the guide was exceeded was just 10.6%.
    The other significant statistic (for now, I may pick more out later) was that - as you might expect - vacant freehold houses were by far the most likely property to exceed the guide, and by the highest amounts. Of the 15 sub-200k lots that exceeded the guide by more than 20%, over half were vacant freehold houses, even though these accounted for less than 18% of the total of 85 sub-200k lots.
    Overall the data strongly supports what I suspected: that - at Allsops at least - if the numbers stack up for you at the guide price + 20% and the property fits your overall strategy then it's well worth pursuing and you have a fantastic chance of scoring in the current market. Especially if you target flats, apartments and tenanted houses.
    On the other hand, if you target a vacant freehold house in the South East, expect it to exceed the guide price significantly - probably by up to around 40% is realistic, so run the numbers accordingly before deciding whether to pursue it.
    As regards the original question about pre-auction bids, guide + 10% is likely to be somewhere near the mark and on the basis of these numbers I wouldn't go any higher than guide + 15%. For flats, especially, I'd probably wait for the auction as these rarely seem to exceed the guide by more than 10%.
    I'm intending to try out this strategy next time Allsop's residential auction comes around in July, so wish me luck.
    I hope all this is useful to somebody somewhere. It feels as though it is to me, but then again it's quite possible that I'm allowing myself to be diverted down a pointless path of statistical analysis when I should be looking at houses.
    Finally, if anyone is as geeky as me and wants the full numbers in Excel form to do some crunching of their own, let me know and I'll send them on. There's lots more to be done I don't have time for now, like looking at the geographical split for example.
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    Impressive analysis Bruce, well done.
    Nothing wrong with crunching the numbers as it will no doubt help you understand your market. It would be interesting to compare those results with others around the country as I suspect you'll find different areas produce different results. Seems obvious because of the descrepency in the number of flats available in towns.
    Time for a new nickname me thinks: What about Bruce 'the Crunch' Coker or Bruce Choker Coker? (Choker because you obviously throttled the life out of Excel.)
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    It was a life and death battle in which I prevailed... but only just.
    I have a love-hate thing with Excel - it's like my chainsaw; I love what it can do but hate making it do it.
    Just call me "Chainsaw" Coker.
    I will, as you suggest, do likewise for other auctions if and when I can find guide price and results next to each other. It seems that often the guides are buried once the auction is over, presumably in an effort to make it harder to do this kind of thing...
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    Bruce Coker said:
    I will, as you suggest, do likewise for other auctions if and when I can find guide price and results next to each other. It seems that often the guides are buried once the auction is over
    Allsop keep the guides on their website after the results have been issued. Still a pain as you'll need to click through every entry.
    It may be the case that EIG has the tools that allow sold and guide comparisons. Hopefully Amanda can advise.
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    Hi Chainsaw, I thought you might appreciate some numbers from my local auction house, Strettons:
    20B Hotham Road, Putney Guide: £195K Sold: £358K
    33 Holden street, Battersea Guide: £290K Sold: £374K
    41 Lynette Avenue, Clapham Guide: £540K Sold: £615K
    69 Bridge Road, Spalding Guide: £70K Sold: £170K
    415 Hertford Road, Enfield Guide £65K Sold: £114K
    220 Wood Street, Walthamstow Guide £270K Sold: £500K
    Some of the discrepancies between guide and sold prices are outrageous.
    Have fun.
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