If you’re buying a property at auction, you’ll need to make some serious preparations to avoid getting tripped up when you bid.
This includes deciding what your highest bid will be prior to the auction.
If you enter an auction without doing this work, you can get caught up in the momentum of the day and end up bidding much more than you can afford.
This preparation certainly helped me to remain steadfast and not bid above the maximum amount I set for myself when I recently registered for an online auction.
What is offered at the auction? This leasehold gatehouse in Dover is being sold by Pugh Auctions on January 31st for a guide price of £120,000
As I describe below in the second of a series of articles on going to auction, this meant I went into the bidding process with confidence and not overextending myself financially.
In the first article of the auction series I looked at what happened when I registered to buy a wreck at a real estate auction, while the final part will look at what happens after the gavel falls.
What is a target price at an auction?
A property sold at auction has a ‘target price’, which is an indication of where the seller’s reserve price is set – the minimum amount he is willing to accept – and where bidding can begin.
However, it is important to know that the seller has the right to change the reserve price at any time before the auction.
While this is an indication of where bidding might begin, at the same time it is not a suggestion of the price the auctioneer thinks the property will ultimately sell for.
In many cases, the final sales price of a home can significantly exceed the target price.
Andy Thompson, from Pugh Auctions, advises on the best way to go about buying at auction
Andy Thompson of Pugh Auctions explains that this target price should not be the starting point for someone new to auction bidding.
Instead of starting at the target price and working north from there to see how much your budget can stretch, he recommends “working backward.”
Determine what you think the property would be worth when it’s finished and then work your way back to what you can afford.
Mr Thompson says: ‘You have to start by going backwards. It’s less about the target price and more about the final price, and what the property will be worth when it’s finished, taking into account renovation costs and fees.
‘If it’s a property you’re going to live in, you don’t have to make a profit straight away, but you don’t want to pay too much for it either.’
Mr Thompson outlined a number of allowances that you should also consider in your calculations. These may include:
Auctioneers fee
Most auctioneers charge an administration fee or buyer’s premium. These can be as little as £1,000 but can go up to tens of thousands depending on the price of the property.
Sometimes auction houses charge a percentage of 4 percent.
Legal costs
Some lawyers will charge you for checking the legal package before the auction.
The legal package contains a large number of documents, including the auctioneer’s general terms and conditions and special conditions.
These are additional terms added by the seller and can often include additional costs that a buyer must pay at completion.
Arrangement costs
You will also need to consider any arrangement costs if you are considering using a mortgage or bridging finance to pay for the home.
This three-bedroom semi-detached house in the West Midlands market town of Halesowen is being sold by Pugh Auctions on January 30 with a guide price of £220,000.
Seller’s costs
The seller can sometimes pass on some or all of his costs to the buyer. All this is recorded in the special auction conditions.
When calculating the cost of the fees, Mr Thompson explained that you need to take this into account when making a chargeback.
For example, if you thought that a property would be worth €200,000 upon completion, you can deduct the €10,000 in fees and €40,000 in renovation costs.
This will give you an idea of your maximum budget for the home.
“If you pay more than £150,000 for the property, you won’t get all of it back if you have to sell it for whatever reason,” says Mr Thompson.
However, he added that for those purchasing a home to live in, it may be worth considering going over budget for the right home.
“Some people will take this and say, this is my forever home, I’m going to live here for the next 30 to 40 years. “It’s a once-in-a-lifetime event at this location, so it’s worth me paying more than what it’s worth today,” he says.
“While it is a huge financial commitment and investment, it is also a home.”
Some people will set up what is called a ‘proxy bid’, where an interested party gives their maximum bid to the auctioneer so they can bid on their behalf.
Should you consider a proxy bid?
Mr. Thompson advises you to decide in advance on your highest bid and stick to it.
Some people will set a so-called ‘proxy bid’. Here an interested party gives his maximum bid to the auctioneer so that he can bid on his behalf.
For example, you can set a proxy bid of $100,000, and essentially the auctioneer will then bid for you against everyone else in the room up to (but never beyond) that price.
Using this example, if the room bids exceed £100,000, your proxy will stop and you will exit the bidding process.
Mr Thompson says: ‘Sometimes people may not be confident that they will stick to their highest bid once the bidding process goes live.’
However, he added that most people want to remain in control and therefore will not use proxy bidding.
He says: ‘Most people don’t feel comfortable showing their hand before the auction and therefore won’t use the proxy bidding system.’
There is also the risk that the property will sell for just a little more than your proxy bid, and you would know that if you had been in the room you would have raised it and won.
“Maybe you’re kicking yourself because you were so close to success,” he says.
This Victorian end-of-terrace in the Nottinghamshire market town of Worksop is being sold by Pugh Auctions on January 30 with a guide price of £110,000
Smart bidders are at the back…
The smartest bidders usually only appear in the last half hour. This practice stems from auctions held in rooms, where naive new bidders sat at the front while smart investors inspected the back of the room to see who was bidding.
Legally, an auctioneer can ‘bid outside the wall’ up to the minimum price.
For example, if an auction price has a reserve price of £100,000, and the auctioneer starts at £90,000, and no one bids, then the auctioneer may bid at £91,000 and then move on to £92,000 and above. This is to stimulate the auction room so that there are real bids.
Ultimately, a successful bid may result in you not bidding at all
Mr Thompson explains: ‘A smart investor at the back of the room would have a full view of the room to see if there are real bidders or if the auctioneer is bidding outside the wall. Then he knows what his competition is.
‘The smart investor can even keep his guard up and leave the property unsold, so that he can then go to the auctioneer with a cheaper price.’
Ultimately, a successful bid may result in you not bidding at all. It’s much better to walk away from a home that wasn’t meant for you than to overpay for a home that quickly turns into a money pit you can’t afford.
This happened when I entered the bidding space online. I showed restraint and did not bid above my maximum bid, which included purchase costs and renovation costs.
Mr Thompson concluded: ‘It’s very easy to get carried away with the romance of buying your dream home at auction and it’s a great feeling when you secure that winning bid.
“But ultimately it’s also a huge financial commitment, and there will come a point in some cases where no matter how much you love the property, it just doesn’t make financial sense anymore.”