Before I begin my soliloquy for this month, I have a salutary tale to tell.
When we were putting together the brochure for my upcoming auction, I had an urgent request to include in it, at the very last moment, a large Victorian terraced house. Because of its lateness, the property missed the printer ’s deadline and we had to insert the property on a flysheet. But that is not the point of my story. The house needed quite a lot of work and improvement before it would have been suitable for multiple occupation or letting in individual flats, but otherwise there was nothing exceptional that might prevent it from selling. Twice before, we had offered the property at a very reasonable reserve, and this was the third time of offering. The circulation of the brochure, and the flysheet, went out on the same, only slightly updated, mailing list each time. The lot was advertised in the same journals and newspapers on each occasion. Each time the property was re-offered, the reserve was reduced by a very moderate amount. Having been entered late, inevitably the property was the last lot on a hot day - hardly an occasion when you would expect to sell. The position of “Tail-end Charlie” in an auction catalogue is never popular with vendors since they believe (usually correctly) that by that time in the auction half of the audience will have walked out before the lot is offered. On this occasion, however, to my surprise, the walk-out was smaller than usual, four bidders were determined to buy the property and eventually it sold at £240,000, more than 50% over the reserve and more than 40% over what the property could have been bought for only two auctions previously!
Don’t think that this is an unusual happening. In the days when I used to sell railway property, it was not all that unusual to offer properties on three occasions before they were sold, and very, very often that last sale was at a noticeably higher figure than our reserve at the first sale. I like to think it is the vagaries of the market, rather than failures in our marketing! You can empathise perhaps with me as an auctioneer and valuer over the difficulties of recommending reserves, guidelines and carrying out valuations. No doubt it is the excitement, thrill and surprise of such happenings which makes stepping on the rostrum an elevating (no pun intended) experience every time and makes attending an auction, I hope, exciting for you.
Guidelines & Guidance
I have written in the past about the difficulties of valuing properties and fixing reserves. On the subject of railway land again, the opening three lots in my last sale were all pieces of a closed railway, where the land was up on an embankment between new industrial buildings and open land. There was no prospect of development, and although three roads ended up on the boundary of the embankment it nevertheless needed climbing boots to get up the steep slope. At least there was access to the site at those various points, which is not always so with pieces that have been previously offered by the rail companies, where they only had access along the railway line but where they did not grant such rights to either the public generally or to buyers of their plots. Obviously, this embankment had at one time been part of a lot sold by the old British Rail, but not one that I had handled and therefore I had no past history. Our guidelines reflected the nature of the plots, and I thought it was only their low figures which attracted considerable interest before the sale.
To cut a long story short, my sale started with a bang.
The first lot sold at more that five times the top guideline, and the other two pieces were knocked down at between two and three times the middle guideline. The bidders all looked exceedingly determined to buy, and who was I to discourage them? Needless to say the clients were delighted, so I’m not complaining, but - what did I miss? Thank goodness for me and the client that I was selling at auction and not by private treaty with the low amount of the guidelines quoted as the price.
These lots indicate one of the reasons why unusual lots that may have exceptional interest reach the auction room. This leads me on to reminisce about what sort of properties are offered for sale by auction, and to think a little about which properties are considered appropriate by the auctioneers and the vendors. Let me first concentrate on what I often call the “thatched cottage” syndrome. Some rural firms and suburban firms of auctioneers specialise in offering for sale by auction country cottages, of which the thatched cottage is the prime example. Even when other types of auction during the 1950s were unpopular, the “thatched cottages” were still sold by auction, usually sold in single lots, and generally at a local hostelry. Even since the composite auctions we see today have become more popular and frequent, the cottages are generally still only offered in small, themed sales. This is hardly the place that the buyer can expect to find a bargain, since both vendors and auction houses believe that considerable competition will be engendered between would-be buyers by offering this type of property for sale. That belief is furthered by the feeling amongst valuers that it is almost impossible to judge what price such a property will realise. Of course, you will see from my example above that it does not only apply to thatched cottages. From the owner ’s point of view, therefore, the possibility of a crowded auction in a hotel or public room one evening with bidders fighting to buy is irresistible, with the hope of realising a high price in the auction room as a result of exceptional competition.
Naturally there are other types of properties for which there may well be a benefit to the seller from exposing their properties to such exceptional competition. These include lots that are unique because of their historical associations or their exceptional position; building or development prospects which are in pockets of exceptional interest or demand, or investment properties which are particularly in vogue at the time of selling. Undoubtedly, there are vogues, and there are sites or buildings appropriate for uses which follow the fashions of the time. Over the years, these have included post offices, launderettes, petrol stations, food takeaways, nursing homes, bowling alleys, multi-screen cinemas and docklands, to name but a few. Sites for car washing were in demand a few years ago. Aned we have all seen the demand increase considerably for houses that are let on assured shorthold tenancies or that are appropriate for conversion for this use.
On the other hand, the auction route has also proved more successful than the private treaty sale method in the disposal of properties that are nearly unsaleable. This is why constantly in my articles I stress caution and thorough research before you are tempted into thinking that a particular property is a bargain in the sale room. Properties that are derelict, one should be able to spot, and should be purchased at an appropriate price to allow for this. Nevertheless, can you be certain before you bid that the property you are thinking of buying is not subject to major disrepair or fabric failure, or subject to Local Authority repair notices or closing orders? Although an investment client of mine always claims that his most successful purchases have been of properties that he has not seen and bought off the photograph in the catalogue, he is a man who has been very lucky in many fields during his lifetime. But then there are people who bet on horses who never tell you about the ones that lose! I would not recommend you to follow my client’s formula for success!
You must, of course, protect against purchasing properties that are offered with unsatisfactory legal titles, sold without access, or sold with major fencing, paving, drainage or other similar responsibilities. Make sure you research the title carefully, and not only check these items but whether the property is subject to easements, covenants or restrictions which prevent their satisfactory use. And finally, of course, remember my constant warning only to buy the properties that are in good positions or in areas where you are convinced that they are ‘on the up’.
These pages are full of plentiful bargains bought in the auction room, and I would not want my caution to make you too pessimistic. You probably do not need me to stress the potential of purchasing repossessed houses. Unfortunately for their previous owner-occupiers this category of property has featured considerably in many auctioneers’ catalogues in the waves of repossession that have occurred in this recession. Whilst feeling for those that have been dispossessed, there is no doubt that others have benefited from the shake-out in prices that has resulted from the fall in market values between the heady days of yesteryear. Let us hope that the recent trend in the ‘bottoming-out’ of the value of houses will not be subject to another shake-out if the euro collapses. Probably only then will it be possible to judge the extent of the ‘bargains’ amongst the repossessed houses that are being purchased in the sale rooms at present. Bargains there were; bargains our readers have bought; profits on their resale are frequently reported.
Maybe the opportunities for bargains have been occasioned by the surfeit of vacant houses offered in the sale rooms because of that high level of repossessions. There is no doubt that there are some very good value-for-money properties to be purchased at auction, but one should not consider that ‘repossession’ is always synonymous with ‘a bargain’. I have sold some at figures higher than the prices at which they have previously been unsold at private treaty. So far I have only really talked about the vacant possession house and unusual properties. I will only touch briefly on investment properties. I think it is unfortunate recently that many private buyers have only looked at properties for letting in the domestic field. In my articles in the past I have quoted the excellent yields which office and shop investments can show, frequently with considerable more security in the quality of covenant of the occupier than that offered by a domestic tenant. Only recently I developed the philosophy of investing in ground and chief rents and have only so far just touched on reversionary investments, where the investor in concerned with long-term income or growth in it.
Prices paid for investments depend upon many factors, which include the security of the covenant of the payer of the rent; the quality and position of the property; and the potential growth or variation of the income collectable. You always have to bear in mind the length of tenancy, the frequency of rent reviews, and take a view of the future of the money market and future interest levels. Only then can you consider whether the yield you will obtain and the quality of its security is appropriate for the type of property. Ownership of an investment property can bring responsibilities to the landlord, but generally these are not as tough or as expensive as the responsibilities of a landlord of domestic property. As always, any buyer should not forget the other factors which could affect the future rent of the property favourably or adversely.
Finally, and on a rather separate topic, can I reflect on the matter of not attending auctions but choosing to bid on the Internet. Now that most auctioneers are taking the chance to offer the opportunity to bidders to buy at chattel auctions in the same way, it may be that the Internet is more appropriate for that type of bidding. For property, I don’t think it is. Generally the money involved in the purchase of property is considerably more than that paid for chattels. If you are to bid on the Internet, then the auctioneer has to hold a sufficient deposit to cover the 10% which will be required to be transferred immediately the gavel falls. Therefore it is necessary for the auction house to ensure that purchasers have enough funds available to cover the deposit before the auction takes place.
Quite an administrative responsibility. It is of course something that auction houses are accustomed to doing for people who bid by proxy, but proxy bids are quite uncommon. In that case, the bidders do not attend the auction either, but sign an undertaking to purchase, instructing the auctioneers to bid up to a particular price. Obviously, therefore, in this instance the auctioneers need to hold a bidder ’s funds ready to transfer if he is successful or to return if he is not. The same procedure with the deposit of funds is necessary, of course, for telephone bidders. Although accepted by auction houses, it is not a method which they prefer to handle. It is better for them, and frankly it is much better for the bidder, in my view, to be there and present and obtain the ‘feel’ of the audience and to read the spoken and body language of the auctioneer. Maybe I am still old- fashioned!
The Secret Auctioneer