A Complete Guide to Buying at Auction
Written by: David Snell. Appeared in the June 2009 issue of Homebuilding & Renovating magazine.
An auction is – at least in theory – beneficial to both vendor and purchaser. For the vendor trying to sell a building plot or run-down property, it’s a quick way to prise out any local interest and get to the price they want in the quickest possible time. By setting a reserve price they are able to avoid selling their plot (for the purposes of this article we’ll refer to the opportunity as a plot, but it could just as easily be a rundown house to renovate) for too low a price, and they are guaranteed a completion – assuming the reserve is met – within a month of the auction date.
For the plothunter, auctions offer the kind of transparency that enables them to leverage a certain amount of control over proceedings. In the traditional private tender process, you’ll never really know what level of interest there is in the plot, and what other people are willing to pay. Did you bid well over the odds or did you miss out for the sake of an extra £2,000? The auction process enables you to see how the market feels about a plot and because it’s so transparent, no one has an advantage over anyone else.
Building plots have always been presented for sale through the auction process, but with the current downturn in the property market the number for sale through this route has undoubtedly increased. Which means that you’ll have to learn how to be comfortable with this process and how to make sure it works for you.
Pre-trading and homework
If you’re even a casual follower of the auction market, you’ll have noticed that when a catalogue is published – or shortly after – some of the lots might be withdrawn due to prior sale. That’s the auction equivalent of you knowing nothing about a plot being for sale until you see the ‘Sold’ sign outside. The key to ensuring you don’t miss out is to register your specific interests with the auction house outside of the regular auction cycle. They will know about plots becoming available months before they go into the auction and you can make sure you don’t miss out by being in touch with them fairly regularly — and making your case as to why you should get a preferential bite at the cherry.
Of course, pre-trading can work in your favour, and if you are interested in a plot that you see in a catalogue, you’ll need to make all the key decisions in terms of price immediately and contact the auctioneer to make an early offer. Some may not accept pre-sale bids; others will. Go in with your best price and an ability to complete the sale swiftly.
Regardless of what happens, if you are interested in a property, be sure to get hold of a copy of the legal documents that the auctioneer will be able to provide at the viewing stage. Run them past your solicitor and explore as many of the issues (planning permission, access, services, rights of way, title, etc.) as possible in the time preceeding the auction itself.
Guide prices — and what to pay
So how accurate are the guide prices you’ll see in catalogues? Well, in short, it depends on the lot in question, but in general they are a lot more accurate than they used to be. At the height of the housing boom in 2006, bidding often used to start well in advance of the top guide; these days, it’s a much more realistic assessment of what you might end up paying for the plot. Bear in mind that there could well be a reserve price set in place by the vendors which, if not met, means that the lot will not be sold. The auctioneer will usually start prices below the reserve in order to help build a bit of momentum in the bidding process.
One of the basics of buying at auction is to set a limit price, which must be a price you’re happy to pay and which makes sense. In order to come up with this price, you’ll need to assess the value of the plot. Work this out by establishing an end value for the completed project, subtract your estimated build costs (using the Homebuilding & Renovating Build Cost Calculator as a starting point) and an extra 10-20% (for profit), and the figure you’re left with is the true value of the plot on offer.
Tactics in the auction room
An auction room is an intimidating place for the layperson. There will be neat rows of chairs. The auctioneers will be on their rostrum or behind a table conferring with the vendor’s solicitors or acknowledging the greetings of clients and old friends, including the local builders. And then it will begin. Sometimes it’s easy to follow. Sometimes the delivery is so stylised or so fast that it all goes by in a blur. For that reason, it makes sense to go to a few local auctions before the one that contains anything you might be interested in. It will make you much more comfort able with the process.
If you’re going to bid, make yourself known to the auctioneer beforehand and sit somewhere in the room where you can be seen clearly by them and where you can see all of the other people in the room, especially the other bidders. You’ll have to look closely because many of them have developed ways of bidding, such as a slight raising of the eyebrows or a twitch of the nose that the auctioneer is looking out for but which are designed to conceal their interest.
One of the more amusing aspects of auction rooms, particularly those that aren’t quite full, is the ‘move to the back’. People will sit down near the front initially but when it comes to bidding time, many people will abandon their chairs and decide to stand on the back wall — in order to get a better view of proceedings (and their competition) and perhaps take themselves out of the spotlight a little.
The first bids will be spoof bids designed to get the thing going and are often made by members of the agent’s staff. You may experience a surge of hope as the process seems to reluctantly get into gear. But then it will speed up. Don’t join in the bidding until it starts to slow down again, and the increments by which the price is rising become smaller.
Then you can see by the turn of the auctioneer’s head and his outstretched arm, just who you’re really up against. Watch out for the telephone bidder: the person, possibly also a member of the agent’s staff, who confers into a telephone before making a bid. There may or may not be somebody on the other end of the line. It might just be a ruse to get the bidding up.
Don’t get carried away. When you go into an auction you need a clear idea of your strategy and the maximum price you can pay. But at the same time, don’t lose your plot for a few hundred pounds. If the bidding is creeping up, try topping it one last time, doubling the increment rise.
If the reserve isn’t reached, the real bargaining begins and you need to make yourself known immediately to the auctioneer to enter negotiations to buy by private treaty. You won’t be alone, but if you can make an offer close to the reserve, you stand a good chance.
If you’re successful
You’ll need to arrange funding prior to the auction. If your bid is successful, you’ll be expected to pay a 10% deposit there and then (many auction houses insist on a banker’s draft but some will accept a cheque — contact the auctioneer for details to make sure you have the right payment) and the remaining 90% within 28 days. You’ll also need to bring along some ID (passport is best) on the night.
Useful Information
Identify the main auction houses in your area using plotfinder.net and online property search engines. Essential Information Group (eigroup.co.uk) – for a subscription – offers comprehensive and searchable details on all UK properties going to auction (and has a database of past sales). Also, try national property auction houses such as Allsop (allsop.co.uk) and Roy Pugh & Co (roypugh.co.uk), who tend to have quarterly auctions in the main cities, but selling both commercial and residential property across the country.
Further reading
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