Property auctions are a great place to find a variety of properties and opportunities. Many properties end up in auction for a number of different reasons – it could be that a quick sale is needed (e.g. repossession), a best market price needs to be achieved (e.g. housing association stock), the house requires refurbishment (difficult to get conventional lending), the property is unusual (e.g. a water tower) or there are complicated legal issues which make it difficult to sell via private treaty (through an estate agent).
Auctions can offer great opportunities for property investors as some properties can be bought at “below open market value” and in some cases properties can sell for around 50% of their “market value”. However, the key is in understanding what the “market value” is and in understanding the different risks associated with the property.
To understand if a property is a potential bargain the first step is in doing thorough research. This will include understanding the resale value of the property – this can be done via online property portals, checking land registry transactions and talking with estate agents in the area. This research will give you a good indication as to how the auction price fits with the “market value”.
The next step is to understand what you need to do to “unlock” the value of the property so that it can be sold on the open market (through an estate agent). In the case of a property which requires refurbishment this is fairly straightforward. Once you have established the resale price, you will then need to understand what standard of refurbishment needs to be completed so that you can achieve the predicted resale price. The key to making this work for you is in understanding the cost of these refurbishment works.
Most investors will start with the anticipated resale price and work backwards to see if the deal “stacks”. What this means is that a property price will be decided by its end value, minus the cost of acquisition, the cost of refurbishment and the profit the investor intends to make. For example, an investor may see a property with a guide of £120k and having done research established its market value is £180k when complete. Now if the property requires £60k refurbishment to complete to “market value” this is not a good deal! However, if that same property can be brought up to spec for £20k then the investor is looking at making a gain of £40k if they buy at the guide price of £120k and sell for £180k. In this example, the property would then be a bargain and could net the investor a tidy sum!
Buying property at auction can be a lucrative way of property investing, but the key is in understanding the market, the property and the potential pitfalls and opportunities. Not all properties sold at auction are “bargains” but thorough research and knowing your market will mean you can buy with confidence and hopefully make some good profits!