Developing Your Auction Strategy
10 Auction Strategies – You will find properties falling into one or more of the categories below in most auctions. The choice is yours. Remember you will almost always be buying property that needs work that is located in a lower cost neighbourhood of the surrounding area.
- Buy To Let
- Buy AST Tenanted
- Buy To Flip
- Buy Off-Location
- Buy Unmodernised Fix & Flip
- Buy Unmodernised Fix, Let & Re-Mortgage
- Buy Repossessed
- Buy Derelict Fix & Flip
- Buy Pre-Auction
- Buy Unsold Lots
Before you start buying investment properties, you should develop a strategy that suits your aims and objectives. There is a saying, ‘one man’s meat is another man’s poison’ and so it is with buy to let/property investment strategies. ‘The Right Strategy’, applicable to all, does not exist but there is a right strategy for you that will deliver your aims and objectives, whilst reducing the inherent risks to an acceptable level.
When buying through the auction rooms, a clear, well thought through strategy is even more important because the timescales give you little opportunity to either develop a new strategy or amend an existing one.
The timescales I am referring to are the 21-28 days between catalogue release and the auction day when, if your bid is successful, exchange of contracts take place. So speed is of the essence but speed must not compromise any aspect of your auction strategy. Even though you are looking for those elusive bargains, you must also quickly identify the ‘duds’.
The most profitable strategy, costs and returns, in or out of auction, is one that you can standardise and simply keep repeating.
The term is ‘cookie cutter’.
Take my strategy: For reasons I will cover later, I buy and fix-up terraced houses. If the footprint/dimensions are at least 15ft by 23ft deep, I can refit to my ‘cookie cutter’ specification, more on that later.
The ‘where’ will be dictated by and depend on your available cash reserves. Your options with £100,000 will be far greater than with £50,000.
In fact, at auction, with the obvious exception of London, you can buy stock at auction in virtually any region & location of the UK with £100,000 as can be seen on this map.
The ‘what’ option should be based on numbers plus elimination/mitigation of risk, so your head should rule, but property investment – the property, location and tenant – is really ‘touchy-feely’. Unfortunately the deciding factor is often what you as the buyer will actually like so the ‘heart’ often wins.
So what do you want to do? There are a number of different strategies you can develop when buying at auction including the following buy, fix and let strategies. In each case you want to buy a property that is ‘fit for your purpose’. For example, if your strategy is for full-on refurbishment then everything in the property should be old, worn, well past its sell-by-date and probably only fit for the skip.
You could buy and carry out a light makeover/refresher. This strategy is light on cash output but you are unlikely to release all your cash on completion so you will have to leave some cash in the deal. The majority of properties sold at auction are suitable for this strategy.
You could buy and carry out a complete redesign and renovation. This strategy is heavy on cash but, buy right, and you will be able to release all your cash on completion (NMLI) and repeat the strategy. Suitable properties needing ‘complete modernisation’ are common at many auctions but this niche also includes the ‘duds’ so care and thorough due diligence is a must.
Of course there are a number of shades of grey between a light makeover and complete refit. The reason I carry out a ‘redesign and complete modernisation’ is because with anything less the question always arises; where do you stop?
At the end of the job whatever you don’t fix or refit will look tired when compared with the new work. Fit a new kitchen but keep the good existing bathroom and the bathroom will no longer appear quite as good as when you bought the property; after all it is not new and pristine.
Before leaving the refit strategies, properties also come through the auction rooms that are part built. Often the developer will have gone bankrupt and there are bargains if you are confident in your development skills. I say ‘part built’ because these properties can range from footings only, through to the final finishing off, only needing to fit the bathroom, kitchen, boiler etc.
Generally this strategy is cash heavy but, if held and re-mortgaged, they should result in more cash out than cash in, resulting in a cash-back unless you choose to leave the equity in.
With part built, because the property was not ‘liveable in’ prior to purchase, if you let it you can’t split the completion costs between revenue and capital for tax purposes. All completion costs are deemed as capital.
Another strategy is to buy and redevelop a larger single property into separate flats a.k.a. ‘slice and dice’ or ‘title splits’. This strategy is heavy on cash but on completion you should be able to release more cash than you invested, so offering another potential cash back (if you get it right). You can also both sell one onwards and keep one (to let) at the same time.
With this strategy, you would obviously need a larger terraced house than my 15ft x 23ft as outlined above, but it would be quite easy to work out the minimum size needed and now you have the start of another ‘cookie cutter’ approach.
Because you will need planning consent to redevelop property into separate flats, you need to be really confident about obtaining planning consent post-auction. The same applies to any property needing post auction planning consent, such as extensions and change of use.
A variation on residential that requires planning consent is to split a commercial property (shop) into a shop and an upper storey flat(s).
There are more hurdles to overcome with this strategy, including getting mortgages because many lenders avoid properties which are a residential and commercial mix.
A word of advice; whatever strategy you decide on, make sure you enjoy yourself. Don’t do it solely for the money. Buying at auction and seeing a project through to completion demands considerable time and effort and it can at times be cold and dirty work, which you are unlikely to repeat if you’re not enjoying the experience and having fun.
As I said, I buy terraced houses in a very distressed/rundown condition but technically they are still liveable.
Pic is an un-modernised terraced house in Coventry guided at 50k for the Bigwoods 23-2-17 auction.
Why do I do this? Well terraced houses with a 15ft x 23ft footprint exist in every region of the UK, so I can operate or teach my strategy throughout the UK.
Terraced housing is the first choice of a large number of tenants and many first-time buyers.
The majority of lots in most auctions are terraced houses in various states of distress. The result is a virtually inexhaustible supply of properties which are ‘fit for my purpose’ and ready for my cookie cutter approach.
But you may decide that you prefer to work with semi-detached houses, again, a huge choice in auctions rooms, all in various states of distress, the same applies to detached houses, though fewer in number, and more cash is needed than a distressed terraced house.
Flats, and many needing work are sold at auction, are often low cost, but be careful, flats are not the first choice of many tenants or first-time buyers if affordable terraced housing is available locally.
You may also have difficulty re-mortgaging to release all your cash. Lenders can be quite restrictive about flats, no commercial mix, no high-rise (5 floors+) and no concrete (walls?) to mention just three reasons why lenders don’t like flats.
The Ready-Let Strategy. You could buy a property that is already let, and many are sold through the auction rooms. Once again, even though tenanted, many are rundown, needing work which can be delayed until you have a vacant possession or carried out with the tenant in-situ, paying rent.
The detached house in the pic is a Multilet in Stoke on Trent, guided at 50k with an income of 22k, auction Feb 2017!
Once I completely renovated a terraced house, whilst the tenants were initially on holiday then stayed with friends and the rent was paid through the whole period!
So, your cash will determine (1) where you can afford to invest (2) what type of property (3) how distressed/how much work needs to be done.
So let’s assume you have decided on the region, drilled down to a location, and decided on your ideal property and ideal condition. Unfortunately, you still have more work to do before you rush off and start buying.
You need to know whether properties meeting your criteria are coming through the auction rooms in numbers, not just the occasional lot. There are two ways of finding out.
The first is free using Rightmove and their ‘Draw a Search’ facility. This facility will alert you about any properties meeting your criteria including those now being auctioned. I say ‘now’ because not every auction property is listed on Rightmove as it appears to only list auction properties if they were conventionally marketed before being put into an auction.
The alternative, or in tandem, is once again Essential Information Group (EIG). Though not a free service EIG will keep you posted by e-mail of all, and I mean all, properties meeting your buying criteria being sold through the auctions. You can also specify up to five different regions/locations changing the property criteria in each case.
Next we come to the fix-up. As I’ve said, virtually every auction property requires work from a little to a great deal. I calculate my buy/bid price by deducting from the fixed up value the cost of fix-up plus transaction costs and profit. For example, fixed up value £100K, fix-up cost 20K, transaction cost £1K, profit £15k, so a buy/bid price of £64K. Before I’m challenged on one missing item, (interest on any loans), I only include interest if I’m flipping because if you are letting, the interest is in part tax deductible against the rent.
Costing the fix-up really brings the ‘cookie cutter’ into play. You start by making a list of each work item that you plan on carrying out in every, same type of, property you buy.
To help with this process I designed my Investment Property Analyser, which includes a list of over 50 work items from clearing through supplying and fitting the bathroom/kitchen to redecorating. It also includes small jobs such as repairing floorboards and gutters. Now every property I buy is not going to need all 50 items but most will need most of the items because I’m buying ‘fit for my purpose’.
Because my bid price is linked to the fix-up cost and because I can’t expect my builder to spend a day viewing it without charge in the hope that my bid will be successful, the builder gives me the labour and material cost for each work item.
These costs are pre-loaded into the Analyser and as I tick off each job the Analyser auto calculates within minutes a fairly accurate cost of works, which then allows me to calculate my maximum bid price. Remember, my cookie cutter works will be the same in the 10th house as in the 1st.
Now we come to the vexed question of surveys, I say vexed because the majority of people I talk with do not agree with my policy, in fact, when delivering talks on auctions at network meetings, I have been accused of being totally irresponsible. It is for you to judge.
A survey is expensive ranging upwards from a few hundred pounds. If you’re going to rely on surveys, you will be surveying many more properties than you will bid on, let alone buy, because your survey will be integral to your due diligence. If the result is good then you can continue towards bidding, if the result is bad, you still have to pay the cost of a wasted survey. You can’t only pay for good surveys, but even good surveys can also be wasted because you can still be outbid on the day.
Surveying estate agency sales is different because your offer can be made ‘subject to survey’ but you can’t make your auction bid, ‘subject to survey’.
Because of this potentially substantial ‘waste of money’ I seldom have a property surveyed and if it has obvious structural faults, I include a worst-case scenario cost in my bid calculations.
Have I made mistakes with this policy, yes I have, but the cost of fixing the odd problem that a survey might have highlighted has been far less than the accumulated costs of multiple abortive surveys.
My advice is, if in doubt walk away, there will always be another deal which will be trouble-free.
The next ‘check’ is solicitors. When a property is put into auction a legal pack is prepared which includes the searches, title deeds, leases, planning consents etc. A good legal pack will include all these documents but there is no requirement by a vendor to include any of the documents or for that matter to prepare a legal pack, though most auctioneers will insist that something is prepared. Once again speed is of the essence assuming that you’re going to use a solicitor to check the legal packs. Even though there may be a small cost I would always advise using a solicitor, but your solicitor should only be inspecting the legal packs of properties that have passed all other aspects of your due diligence with the legal pack determining whether you bid or not. Out of 20 properties viewed you might check the legal pack on one or two.
Always see if you can do a deal with your solicitors to check the legal pack for free or add the cost to the conveyancing of successful bids.
Buying at auction may involve borrowing and there isn’t time between auction and completion day (14-28 days) to rely on arranging a conventional mortgage. There is though a relatively small group of lenders who specialise in arranging short term loans (max. 6 months) for investors in advance of a conventional mortgage being arranged.
These lenders provide bridging finance because their lending ‘bridges’ the period between buy and mortgage. It is normal for bridging finance, generally 70% of the hammer price, to be made available within seven days of the auction, and you have 14-28 days to complete. Whilst you can always use your own cash resources to fund an auction purchase, bridging finance speeds up your strategy because you only need 30% of the hammer price plus transaction costs.
There are two bridging options, open and closed. With open, you don’t have a DIP mortgage arranged to repay the bridge at the end of the period, with closed, you do. Generally closed bridging is less expensive. So before you start, sort out which mortgage lender you’re going to work with so you always use closed bridging.
We have now reached the last piece in my cookie cutter jigsaw, which are CAD drawings. Keeping to the same type of property and buying mirror images in your chosen location, use CAD to work out the very best way of refitting/renovating the property.
I use CAD to illustrate the before and after of a full-on ‘guts out’ refit of a terraced house. The drawings include the exact location of all fixtures and fittings such as power points, radiators and how the furniture would be set out in each room.
These drawings are then used by my builder for final costing purposes and on-site during works by the various trades as a redevelopment blueprint.
Coming back to speed being of the essence, if the footprint of the house is 15ft by 23ft, which takes me less than 5 minutes to confirm when viewing, I know that I can carry out my cookie cutter refit and the approximate cost. If on the other hand the length is only 20ft, I spend time trying to see whether I can magic up the missing 3ft. If it is 25ft, I simply adjust the CAD drawings accordingly, possibly re-siting some fixtures and fittings.