Property prices at auctions are going crazy! The bidding is pushing prices way above their market value - not just by a couple of thousand, but by tens of thousands.
Here are a couple of examples I’ve recently come across.
A property was put up for auction that was located in a street where the best price for any of the other properties had been £230K. The property being auctioned wasn’t in good condition and it was estimated that it would need about £45-50K to bring it up to its full value. The winning bid was £220K - before stamp duty, legal costs and auctioneer’s fees.
Crazy! – that buyer is going to be nursing a serious loss when they get around to doing the necessary modernisation.
Another property in a street of small 2-bed terraced properties was up for auction and the best price any of the similar properties had made in the recent past was £120K. It definitely needed a facelift, which would probably cost in the region of £20-25K. The property had been on the open market, listed at £95K, but no takers, so the owner put it up for auction. Bizarrely, the hammer fell at £112K. Again - this didn’t include all the fees.
Auction fever – taking momentary leave of one’s faculties in the heat of an auction bidding frenzy. Done in haste and repent at leisure.
People have always been stupid at auctions, and one of the strategies I teach is the 90% flip, also known as ‘buy, DON’T refurb, sell. But the massive inflation in property selling prices isn’t just people getting carried away in a bidding war.
Competing on auction day is the riskiest way to buy, as you’re in an open competition, not everyone knows what they’re doing and you can’t win against someone bidding brainlessly.
Experienced property investors do their due diligence, view the property, work out how much they’ll need to spend to get the property back into good order - and factor in a decent profit. It’s in inexperienced investors who decide they want a property and are virtually prepared to pay anything to get it.
Paying an inflated price means the buyer is likely to lose their shirt. Effectively they’re starting out with negative equity.
Who are these people who know so little about property that they’re making such rash decisions?
My guess is that they’re people who have been furloughed and got bored - deprived of their usual leisure pastimes they’ve started watching daytime telly - and the plethora of reruns of Homes under the Hammer. Or they’re spending a lot of time on social media or playing games on their phones where the property gurus are many and various in interruption ads - promising property riches.
Ignorance is bliss! It all perpetuates the myth you can do anything you like in an auction and still not lose money. It’s no wonder inexperienced people with a bit of a nest egg catch the property fever and jump in with no research. After al how hard can it be?
A better way to buy at auctions
Savvy investors know that bidding on auction day means there’s a good chance they’ll be outbid by a Homes under the Hammer innocent!
If you want to buy try one or more of these strategies:
You do need to know how to set the property up right to make it irresistible to auction buyers - which is one of things Ninja Investors learn on my programmes. In fact, a recent delegate reported that he’d seen a property presented exactly as I outlined - and really wanted to bid on it. So it definitely works - but only if you know what you’re doing.
So the moral of this tale is - beware of auctions, there are a lot of inexperienced people looking to ‘make a killing’, who haven’t done their due diligence and have a completely inaccurate image of how it works.
As an experienced investor you can still get bargains at auction - but not by entering a bidding war with a newbie without knowledge.