m is entertainment, albeit well presented by a very knowledgeable property person in Martin Roberts.
Get it right and the profits can be substantial both in £ & % terms. On the profit side hammer prices are generally at least 20% less than market value and fixing up a distressed property should yield a net profit of at least 25%. If letting, because it is possible to split the fix up costs between revenue and capital, any positive cash flow can be tax-free for a considerable number of years. I will cover this strategy in detail later in this book
Get it wrong and your losses can be substantial, way in excess of the cost of the property, the hammer price, because you risk a claim for costs and damages. I will cover this downside in detail later
This book should help you to both recognise and avoid the lemons in the system, resulting in only buying true bargains.
I am always surprised by the number of experienced investors who, for various reasons, don’t buy at auction, even though they recognise and accept that real bargains can be bought.
I deliver property investment lectures and seminars and once asked a group of 60 students, about 20 of which were actual investors with properties, how many had bought a property at auction and the answer was zero, nil, nobody.
One person had bought at auction property, but after the auction, they hadn’t got involved in bidding for the property. Only one other person had even been to a property auction, enjoyed the experience but was still very nervous about the whole process so if this trend continues you are not going to have a lot of competition from the ever increasing number of buy to let investors.
So, what scares people, certainly the prospect of buying a lemon looms large coupled with the difficulty of sorting the good from the bad in the relatively short period of time between catalogue publication/release and auction day, about three weeks, and yet, if you are able to develop the necessary skills, and I have developed those skills along with the supporting software, there are golden nugget opportunities in auctions virtually every week of the year in the UK at prices to suit virtually any budget from a few £1,000 to £100,000’s.
A great deal is made today of working hard on developing a territory to buy BMV using leaflets, and yet every 1 to 2 months auctioneers will send to you in the comfort of your home a catalogue of BMV properties being sold by highly motivated vendors. So instead of walking the streets on cold winter days poking leaflets through letter boxes let the auctioneers do the hard work for you, whilst you do something you really enjoy. If that “something” is leafleting then do both.
With every aspect of property investment if you are going to be successful and safe you need to carry out a substantial amount of due diligence. About the only difference between buying at auction and buying through estate agents is the timescale. At auction you have approximately 3 weeks from catalogue release to auction day. Through estate agents the timescale is virtually unlimited because an exchange of contract date has not been set when the property is first put up sale.
Auction properties exchange contracts on the day of the auction, when the hammer drops, and that date is set when the property is first marketed through the auctioneer’s catalogue.
So where do you, the novice investor, start, and it is not sitting at home watching Homes Under The Hammer every morning, however nice the coffee, as that does not constitute any part of due diligence!
The first driver is money, cash. How much have you got to spend on the property and how much can you afford to spend on fixing it up, most properties will need fixing up to a greater or lesser extent.
In both cases, a substantial amount of both costs can be borrowed. In the case of the property up to 70% of the initial cost, the hammer price, can be borrowed through bridging companies so the cash cost of a £50,000 hammer price could be £15,000 plus transaction costs etc. Please note that properties often sell at auction for less than £50,000, I’m using this sum for ease of calculation purposes.
Fix up can be handled 2 ways, employ a builder who will oversee all aspects of the job, and hopefully deliver the finished product on time and to cost, or DIY, employ the individual tradesmen and buy the materials through trade suppliers at cheaper than retail prices. If you have limited funds then the DIY route is probably the cheapest but will involve you in more work, but you will gain very valuable experience which will help you avoid some of the dreaded lemons.
In a later chapter I will look at assessing & fixing up distressed auction properties, but for the moment assume a fix up cost for a really rundown property of £20,000 and split that 50-50 between labour & materials. If you can pay for all the materials on completion of works, the cash cost of buying and fixing could be £25,000, £15,000 property deposit plus £10,000 labour refit, to fund a £50,000 property + £20,000 fix up project. These figures do not include any associated transaction costs.
So assuming that you have a total of £25,000, the next question is where can you buy a property that needs fixing up for £50,000 and here I would like to introduce you to the leading auction data collection and research site covering every auction in the UK, The Essential Information Group, www.EIgroup.co.uk, more commonly known as simply EIG.
EIGroup is a membership site costing £400 per year, (special terms are available for my readers on application), through which you can carry out a substantial amount of the due diligence associated with buying at auction, including identifying locations plus type and condition where properties can be bought for £50,000 or virtually any other sum that fits with your strategy.
All the data figures quoted in this book are courtesy of EIG
So back to the question, where can you buy a property that needs fixing up for 50K? Believe it or not, there are many locations in the UK.
The Hot South East, in September 2012, Clive Emson sold a Methodist Chapel in Deal, Kent, which could be converted to residential use, subject to planning, for exactly 50K. In the same auction, a 2 bed flat in Margate, close to the sea front and previously let at £4,500 PA but now needing improvement sold for 45K, so even in the hot south-east it is possible to stick to a 50 K budget but it will take work on your part.
Go West, an unmodernised one bedroomed cottage in Bristol sold for 40K in July with Auction House, it was even let at £4,200 pa giving a gross yield of 10.5% from completion day. Yes, you can buy properties at auction with tenants in situ and not suffer any post completion void.
If Wales and the Valleys excite you then, with 50K, you are potentially a wealthy investor. Paul Fosh sold a terraced house requiring modernisation and close to the centre of Tonypandy in their September auction for the possible bargain price of £17,500. This would be a cash purchase unless you took out a personal loan because it would be below the minimum mortgage loan amount of 25K, more on this point later.
I say “possible” because there was no indication of the cost of fix up or final value in the auction results. Both come under the heading of due diligence prior to the auction, and in simple terms the hammer price plus fix up costs should be less than the final value. In this case that could be around 60 K with a high standard fixup
If the 60 K value proved correct then around 30 K could be spent on fixup depending on the amount of profit you wanted to make.
Move north to West Birmingham and in September 2012 Bigwoods, sold a semi-detached in Tipton for 60K which included a building plot to the side. On viewing we valued the plot at 20-25K, subject to planning consent, making the property a real bargain with fixed up values in the same street running at 75K. We were viewing for a client who did not get their paperwork sorted in time!
If you are looking to buy at auction, it is essential that you are fully prepared before you even start the viewing process. Best to trial your expertise through 2-3 auctions before buying, which should show up any weaknesses in your processes. The whole process of buying at auction is time sensitive with very little, if any, flexibility
The following figures come from EIG and show the average hammer price by region over the three-month period June-August 2013. Heavily distressed property sells for well below the average hammer price. In fact you can often buy at 50% of the average hammer price because heavily distressed property sell well below the average achieved in the room which includes higher-value properties
I have included in the table below the maximum cash required assuming either 70%, bridging (Brg), or 75% , mortgages (Mtg), and, as you can see, relatively little cash (last cols) is required to start investing using the auction route and loans.
|June – August 2013||Off||Sold||Value 000||UnS PCM||Av Ham||Csh||50% Av Ham||Min Cash 70% Brg||Min Cash 75% Mtg|
|13||Yorkshire & Humber||727||497||40200||77||81||24||40||12||10|
|9||South-East Home Counties||536||421||72500||38||172||52||86||26||22|
|7||North West Home Counties||207||158||32000||16||203||61||101||30||25|
You will find a small degree of repetition throughout this book because sometimes I include a brief comment on an ancillary subject rather than refer you to another chapter where it is covered in depth. Personally I find the “see X” which involves thumbing through the book, annoying. For example, throughout this book there are numerous references to bridging finance, which are made when it is relevant to the main point of the chapter. But there is also a chapter devoted to “finance” which puts bridging finance under the microscope.
In the next chapter I look at 12 reasons for Buying at Auction followed by Developing your Auction Strategy, and then we return in the chapter “Analysing Regional Results”, and look at the relevance of all the information in the table above, a vital part of understanding the auction process
In the meantime if you require any assistance with auctions or any aspect of buy to let please don’t hesitate to contact me, David Humphreys, (07970) 028539, e-mail David@propertyauctionexpert.com