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Don’t take the auction catalogue at face value

mindset Apr 05, 2022

If you haven’t bought at auction before it’s easy to be misled by the contents of an auction catalogue.  The challenge is that anyone who watches daytime TV and has seen programmes like Homes under the Hammer can be led to believe that every property auction in the country has lots of fantastic deals just waiting to be snapped up.  This isn’t actually the case.

You may see a property listed in the auction catalogue at 20-30% below market value (or even lower in some cases) and a closer look shows it to be in good nick, with no need to refurb.  That looks like a great deal - buy at 20% BMV and refinance at market value or sell on and get an instant profit.  Sounds too good to be true - because it is!

Before you jump into your first auction you need to understand the hidden cost of buying properties at auction.

  1. The guide price - this is the price in auction catalogue and this is the price used as a marketing tool to increase interest.  There is another figure that’s equally important - and that’s the reserve price, but this is confidential between the seller and the auctioneer.  However, a good guesstimate of the reserve price is usually10% higher than guide price.

The reserve price means the property can’t be sold for less than this figure.  So that’s immediately going to remove some of the profit in the deal.

Bear in mind that you won’t be the only bidder on a property like this.  Also there will be many more people who have also been misled by aspirational TV programmes.  They will often bid the price up to way above the guide and reserve prices.  That means your profit will evaporate and the property could even end up selling for way above actual market value.

TIP: In the rare situations where a property doesn’t reach the reserve price and remains unsold you can put in a bid to the seller after the auction is over.  They’re likely to be much more receptive if their property hasn’t sold.

  1. Refinance at market value.  The concept of buying at lower price and financing at market value also has a few holes in.  The mortgage lender’s valuer will be focused on valuing the property at price paid.  If you buy cheap - the valuer will not be interested in what it’s worth, only in what you paid.

If you’re going to convince a valuer that the property is worth more than you paid you’ll need a reliable way to uplift the value and prove you’ve done so.  If you’ve bought a property that doesn’t need much refurbing, that’s going to be difficult.

  1. Auction fees.  There are lots of costs attached to auction purchases and it’s the buyer’s responsibility to ensure they know what these are.  Before you even think about making a bid, you need to thoroughly understand the auction process and associated fees - over and above the actual price you bid for the property.  

Step one is to do your homework beforehand and know exactly what the tipping point is where a property becomes unprofitable.  Stop bidding at max price you’ve identified - or you could end up in a negative equity situation.

You can be sure that most auctions are full of investors looking for doer-uppers.  They are literally hot properties.  My tip is to find a problem property with an issue that needs resolving, rather than the standard doer uppers – if you know how to solve the problem, you can have the advantage over other auctions buyers only looking for the ‘quick win’ if a refurb.  This kind of property may not even reach the reserve and provides an opportunity for post auction bids.

Here's a video about this you might find useful 

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