Is Buying Through Auction the Way Forward for Your Next Investment?

I've won

If you follow me on social media you'll probably already know that I was the winning bidder at a nice property in Crystal Palace yesterday. Instantly you may think "but you're a Clapham investor?" This is true, but as you will know from other project I have on the go one must look slightly outside of their core area to snap up a bargain or two.

What?

The flat I put my hand in the air for is a short lease flat. Again, you may baulk at the thought of purchasing a leasehold with any less than 80 years remaining. There is, however, a little thing called the  Leasehold Reform, Housing and Urban Development Act 1993. This little piece of legislation allows the leaseholder to serve notice on the freeholder that they would like to purchase a lease extension. Something the freeholder can then not refuse...! It's the legal equivalent of the gun to the head; quite contrary to olden days where freeholders would dig their heels in and either not sell an extension or ask for silly money.

Free?

Naturally nothing is free in life... This notice, under Section 43 (C)(2) allows the leaseholder to "specify the premium which the tenant proposes to pay in respect of the grant of a new lease." In layman's terms, make the freeholder an offer. Now this offer can be accepted or rejected; if it is rejected then a leasehold valuer will come in and value it and so forth, and you must pay both parties' legal fees regardless. BUT... fact remains that you could have a very amenable freeholder and they'd be happy to sell you a lease extension in return for a box of chocolates and a dozen roses... You never know! Worst case scenario you will have it valued and pay market rate for the lease extension. Nothing ventured, nothing gained.

Auctions

So short leases are one way to outsmart the competition at an auction. More so than a straightforward refurbishment project, because everyone can do that and then it's a race to the bottom. When you start using "tricks of the trade" you will find there is a bit more scope for profit. Less bidders, and more sophisticated ones that demand higher margins...

If you are interested in learning more about auctions keep reading: My good friend Piotr Rusinek actually buys properties at auction for a living and he's putting on a day of auction learning this weekend! The day will include: how it's done, making savings on reading auction legal packs, using the EIGroup (the RightMove of the auction world) and an introduction to Jay Howard, Auction Manager at Auction House London! so click this link if you are interested in reading more about it and to book yourself on.

As always, if you are keen to start investing, or start doing something a bit more interesting with your current portfolio... Start the conversation on email. I'd love to meet you in person of course at this month's Clapham Property Meet, so do come along. We have a great talk on Planning and Lease options scheduled. Click here for tickets and more info.

A landlord asked me about auctions - and a good thing she did!

Well I tell you what, last week's "auction specials" on the blog have certainly stirred up some interest. Lots of landlords came back to me with potential ideas with what they were going to do after having had a look at the properties in the flesh. All very exciting!

Some of you who are eagerly looking for the next deal but didn't know quite how to go about buying at auction asked me for hints, tips and advice. I thought I'd share these as I know there are plenty of readers out there who WANT to take the next step, but don't realise quite how to go about getting an auction property.

I'll go through a couple of things and perhaps you'll decide it's too risky for you after all. Nothing wrong with buying through estate agents, there can be a lot of competition in the room on the day and that may drive the price up over and above your budget. Don't be tempted to win an auction for the sake of winning (we've all done that on eBay!) as it could cost you dearly.

1. Decide on a property and strategy - will you hold it and rent it out for long term gain? Or will you be looking to add value and resell straight away? If you are just starting out the former is probably a safer bet as it may be financially restrictive to be able to spend ample on a property and then have the funds for refurbishment too.
   
   
2. If you are holding and renting are there tenants in situ already? Are they professionals or Housing Benefit tenants (if the latter your income will be capped by the Local Housing Authority - they only pay x for a 1bed and y for a 2bed and so forth, so you'll never get more than that). If there are private tenants in there are they paying market rate? Check with local agents (ahem) as to what you can reasonably expect to get in its current condition and after you do some work. Factor in the costs of the work - is it worth doing straight away to get a higher rent, or could you use that money to perhaps invest in another property?
   
   
3. Are you buying with a mortgage or buying with 100% cash? If you are buying with a mortgage you will be wise to get the property surveyed first and bid with a mortgage offer in hand for the highest amount you will want to pay. This way if you get it for less, great, it can be amended and you'll have the funds ready for completion. But if you go over you will have to find the difference yourself! If you are buying a flat to hold and rent but you want to do work to it this will raise the value. In order to take advantage of that boost in value you will want to buy with cash if possible and then mortgage it later. You can, of course, take a redemption free mortgage but these often attract a lot of fees, thus eating into your returns. Do your sums wisely.
   
   
4. Always have an exit strategy. Holding and renting? What if you can't get the rent you want, are you happy to drop the price? Be sensible. Better get £450pw when you can't get £500pw because the alternative is £0! You can give the market a try next time around when tenants are in there paying your mortgage and you have their 2 months' notice to play with.

There are always potential downsides to buying at auction and particularly pre-bidding. You may want to look at 3 properties, get 3 different lots of surveys and mortgage offers done and see what you end up buying on the day - but this is expensive, if you end up buying the first one then the other two are wasted, but all 3 could go over what you are willing to pay and you can waste thousands in search of a bargain - is it really a bargain then? Higher risk, higher reward of course.

There is of course the old school buy-to-let route. A slower process of course but you are generally in less competition. Pick your flavour - this will be down to your attitude to risk of course.

As always give me a call on 020 3397 2099 for a chat or drop me a line on: jeroen@xandermatthew.com – I'm always on hand to answer any property related questions.