If you are buying a property at auction, you’ll need to do some serious preparation in order to avoid tripping up when you bid.
This includes deciding in advance of the auction what your top bid is going to be.
If you enter an auction without doing this work, you may end up getting caught up in the momentum on the day and end up bidding far more than you can afford.
This preparation certainly helped me to stick to my guns and not bid above the maximum amount I had set for myself when I recently registered for an online auction.
What’s on offer at auction? This leasehold gate house in Dover is being sold by Pugh Auctions on 31 January with a guide price of £120,000
As I detail below in the second in a series of articles about going to auction, this meant I confidently entered the bidding process and didn’t over-stretch myself financially.
In the first article of the auction series, I looked at what happened when I registered to buy a wreck at a property auction, while the final instalment will look at what happens after the gavel does down.
What is a guide price at auction?
A property being sold at auction will have a ‘guide price’, which is an indication of where the vendors reserve price – the minimum amount they are willing to accept – is set, and where the bidding might start.
It is important to know, however, that the vendor has the right to change the reserve price at any point before the auction.
At the same time, while this is an indication of where the bidding might start, it isn’t a suggestion of what price the auctioneer thinks the property will eventually sell for.
In many cases, the end sale price of a property can far exceed the guide price.
Andy Thompson, of Pugh Auctions, advises how best to proceed with buying at auction
Andy Thompson, of Pugh Auctions, explains that this guide price shouldn’t be the starting point for someone new to bidding at auction.
Instead of starting at the guide price and working north from there to see how much your budget can stretch to, he recommends ‘tracking backwards’.
Decide what you think the property would be worth when finished and then work back to what you can pay.
Mr Thompson says: ‘You need to start by tracking backwards. It is less about the guide price but more about the end price, and what the property is worth once it is done up, factoring in renovation costs and fees.
‘If it is a property that you are going to live in, you don’t need to realise any immediate profit, but you don’t want to overpay for it.’
Mr Thompson outlined several fees that you will also need to take into account in your calculations. These can include:
Auctioneers fee
Most auctioneers will charge an admin fee or buyer’s premium. These could be as little as £1,000, but could also stretch to tens of thousands depending on the price of the property.
Sometimes, auction houses charge a percentage fee of 4 per cent.
Legal fees
Some solicitors will charge you for checking the legal pack before the auction.
The legal pack will include a host of documents, including the auctioneer’s terms of business, and special conditions.
These are additional terms added by the vendor and can often include additional fees for a buyer to pay on completion.
Arrangement fees
You’ll also need to consider any arrangement fees, if you are considering using a mortgage or bridging finance to pay for the property.
This three-bedroom semi-detached property in the West Midlands market town of Halesowen, West Midlands, is being sold by Pugh Auctions on 30 January with a £220,000 guide price
Seller’s fees
The seller can sometimes pass some or all of their costs onto the buyer. All this will be documented in the auction’s special conditions.
When calculating the cost of fees, Mr Thompson explained that you need to factor this in when tracking backwards.
For example, if you thought a property would be worth £200,000 once done up, you could then subtract the £10,000 of fees and £40,000 of renovation costs from that.
This would give you an idea of your maximum budget for the property.
‘If you are paying more than £150,000 for the property, you are not going to get all of that back if you needed to sell for whatever reason,’ Mr Thompson says.
However, he added that, for those buying a property to live in, it may be worth considering going over budget for the right home.
‘Some people will take this on the chin and say, this is my forever home, I’m going to live here for the next 30 or 40 years. It is a one-off in this location and so it is worth me paying more than it is worth today,’ he says.
‘While a huge financial commitment and an investment, equally it is a home.’
Some people will set up what is called a ‘proxy bid’, where an interested party gives their maximum bid to the auctioneer for them to bid on their behalf
Should you consider a proxy bid?
Mr Thompson advises making your decision about your top bid in advance, and sticking to that.
Some people will set up what is called a ‘proxy bid’. This is where an interested party gives their maximum bid to the auctioneer for them to bid on their behalf.
For example, you might 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 bidding in the room exceeded £100,000 then your proxy would cease and you would be out of the bidding process.
Mr Thompson says: ‘Sometimes, people may not trust themselves to stick to their top bid once the bidding process has gone live.’
However, he added that most people will want to remain in control and so won’t use proxy bids.
He says: ‘Most people don’t feel comfortable showing their hand before the auction and so won’t use the proxy bidding system.’
There is also the risk that the property might sell for just slightly more than your proxy bid, and you would know that if you had been in the room you would have upped it and won.
‘You might be kicking yourself as you were so close to being successful,’ he says.
This Victorian end of terrace in the Nottinghamshire market town of Worksop is being sold by Pugh Auctions on 30 January with a £110,000 guide price
Savvy bidders sit at the back…
The most savvy bidders tend to only appear in the last half an hour. That practice stems from auctions that were held in rooms, with naïve new bidders sitting at the front while more savvy investors sat at the back and surveyed the room to see who was bidding.
Legally, an auctioneer can do what is known as ‘bidding off the wall’ up to the reserve price.
For example, if an auction price has a reserve price of £100,000, and the auctioneer starts at £90,000, and no-one is bidding, the auctioneer is allowed to bid at £91,000 and then go on to £92,000 and above. This is to help stimulate the auction room so that a genuine bid is made.
Ultimately, bidding successfully may mean that you don’t bid at all
Mr Thompson explains: ‘A savvy investor at the back of the room would have a full view of the room to see if there are any genuine bidders or if the auctioneer is bidding off the wall. He will then know what his competition is.
‘The savvy investor may even sit on his hands and let the property go unsold so that he can approach the auctioneer afterwards with a cheaper price.’
Ultimately, bidding successfully may mean that you don’t bid at all. Far better to walk away from a property that wasn’t meant for you, than overpay for a property that quickly turns into a money pit that you can’t afford.
This was what happened when I entered the bidding room online. I showed restraint and didn’t bid over my maximum bid, which factored in the purchase fees and costs of renovations.
Mr Thompson concluded: ‘It is very easy to get carried away with the romance of buying your dream home at auction and it’s a great feeling when you do secure that winning bid.
‘But at the end of the day, it is also a huge financial commitment and there will come a point in some instances where no matter how much you love the property, it just doesn’t stack up for you financially.’
