Auction is the most thrilling way to buy property. It is arguably the most stressful, competitive and adrenaline-fuelled experience that exists in the UK property market – but also probably the most fun.
First-timers to the auction room may feel nervous about stepping over the threshold – horror stories of properties bought at auction abound. But there is a big but simple secret to make auctions work in your favour: research is the key to success in buying well and avoiding mistakes.
Caveat emptor – buyer beware is the watchword, it means do your homework and remember the saying: “if you fail to prepare, prepare to fail”.
A business model for early retirement
Alex Ellis-Ruano, 52, retired aged 47 with a healthy six-figure-income from a property business built up at auction. He started in 2009 and now works about eight hours a week managing his portfolio.
“You need to have a model to make money in business,” he says, and his 30-strong Manchester rental portfolio is testament to his success. But it wasn’t always like that. “In the beginning I was learning,” he confides, saying his first property took 13 months to rent. “I listened to agents who told me what I wanted to hear rather than checking the prices myself.” A mistake he has never made again.
Education and understanding his market have been key to Ellis-Ruano’s success, from picking the brains of local agents and auctioneers to following builders around and pricing up every renovation project. Having acquired detailed knowledge of his local market he then built a network of trusted traders and his portfolio yields an impressive 12-15%. “It’s all about the numbers,” he says.
Alex’s advice
■ Always view the property and read the special conditions because there can be hidden expenses
■ Know the open-market value of the property and don’t pay more than it’s worth
■ Learn your market and devise a model that works for you
Ellis-Ruano knows exactly what price he should buy for, sell for and what a property rents for – right down to how much the local council pays for DSS rates.
“The only real mistake I made was when I went to auction and went wild and bought a house I hadn’t seen. It had a sitting tenant who was fine for a while, but then he stopped paying rent. The property needed work and was a headache. I sold it at a loss, but I had gained on the rent and I learned an important lesson: you must view a property before you buy.”
On the upside, knowing his numbers meant Ellis-Ruano was well-positioned to take advantage of a spike in the local housing market.
He explains: “I just sold a property which I bought last year for £50,000. It was the ‘worst’ one and I decided to sell at auction. It sold prior for £70,500, so I netted £20,000.”
Success is about taking risks – and sometimes you lose
Gino Chiappetta, in his fifties, started buying property at auction in 1998 and has since completed sales on many lots. His star purchase was a property in Kensington, his failure was something he never even intended to buy.
“I saw a lot I liked the look of in a posh part of Kensington, just off the high street,” he says. “I went to the first viewing and there were more than 300 people, it was a complete rugby scrum, but I loved it. It had my name all over it and I decided there and then I would buy it.”
Fast forward to auction day, where the sale was being held at a swish London hotel with a beautiful garden.
“It was a hot summer’s day and I met a friend before the auction to have a glass of wine, that turned into a few more… and before I knew it the alcohol had ravaged my brain and convinced me that, no matter what, the lot had to be mine. Against a guide of £150,000-200,000 I bought the lot at £365,000.
“The next day I collected the keys and got 10 sets cut for the property, took a photocopy of the auctioneer’s catalogue details and took them to the local estate agents and asked them to sell it for £650,000.”
Three days later, Gino was sat on a plane about to go on holiday to Cyprus.
Gino’s gems
■ Buying at auction involves taking risks
■ Know your market inside out; making money requires intimate knowledge
■ Be prepared to lose money and make money
“I got a call just as we were about to take off saying that a guy was going to do an instant deal exchange on the property for £650,000. By the time I landed, the property had sold and I had made £285,000. But, there’s a funny sting in the tail – while I had been on the flight and exchanged, another offer had come in for £750,000.”
But winners can also lose. “An associate informed me of an interesting lot to bid for at auction,” says Chiappetta.
“When the lot came up I bid and won at £750,000. When I informed him of my success, he said to me: ‘Why on earth did you buy that?’ It turned out, I had bid on the wrong lot number!
“When I looked into what I had bought I had so many sleepless nights, it was an awful lot with so many planning issues and legal battles.
“But there was nothing I could do, the property was mine. I really didn’t want it and so I put it back to auction, where it sold for less and I lost £85,000.
“I don’t regret selling it, it took a huge weight off my shoulders.”
Do your research and pick your battles wisely
Webby Jamel, 46, is an experienced builder who, three years ago, had what he calls an “epiphany”, when he realised that if he built his own buy-to-let portfolio he wouldn’t have to work so hard. His remit was to find properties that could produce a healthy income and have a development angle.
A four-storey property in Dover for £130,000 converted into two flats was his first auction purchase, in 2015. The upstairs flat was already tenanted, giving him cashflow from day one. Keen to make the property work for itself, he refurbished the lower flat and let it, before turning his attention to the “huge” top floor flat.
The tenant vacated and Jamel set to work converting the flat into a five-bedroom HMO. A few months later the £10,000 renovation was complete, the property was valued at £195,000 and bringing in a gross income of £2,600 a month.
Buoyed by early success, he returned to the auction room and bought a flat in Margate from the receiver for £49,000. As the flat already had a paying tenant in situ, and was in reasonable order, he didn’t carry out works, but he did get the flat valued for resale on the open market: £85,000.
Jamel’s auction success continued as he bought a former tanning salon in Maidstone for £152,000. Once a terraced house, he converted it back to residential, increasing the capital value to £250,000.
Auction, it seemed, sat well with Jamel’s new way of life. That was until, in his words, he made his first “screw-up”.
Impatience leads to a gamble
Bored and impatient and with cash burning in his pocket, he became “itching to buy something”. Having spoken with his cousin, who had started to invest successfully in Liverpool, Webby decided to follow his lead and at auction bid and won two terraced properties. Had he stopped there, the story would have had a happy ending.
However, fuelled by his confidence and buzzing from the thrill of winning, Jamel looked down at the catalogue, which showed a “glossy image of a piece of land”.
“I was in the zone” he says.
Caught up in the moment, he bid for the lot, having never seen it, nor having done any research other than seeing the picture of the plot “which looked good on paper”. He knew he was gambling, but as a builder he felt confident he could build it out. He didn’t think there was anything to worry about.
His maiden bid at £70,000 was successful, and while delighted by the win, it was then that the alarm bells started to ring. Against a guide of £90,000-£120,000, he felt uneasy that there were no competitor bids. But once he had paid his 10% deposit, and started reading the legal pack later that day, he was soon to realise why.
“Oh God!” was his reaction as he learned that not only was he liable to pay a legal bill to the vendors of £5,000 for their costs, but if he ever got planning permission on the site he would also have to share the uplift in value with the original owner. The problem was, as he was soon to learn, it was unlikely that the site would ever get planning permission. “I had bought a dead duck,” he says.
Negotiating a way out
The history showed all planning attempts and appeals had failed. “What I had to come to terms with was my exit strategy,” he explains.
Webby’s wisdom
■ Know your exit strategy
■ Do your homework
■ Pick your battles wisely
Having realised that any potential success for the site would mean years of expensive and stressful battles, he decided to walk away. “I knew I had exchanged and so I was prepared to lose my deposit, that’s what I thought was going to happen.” Except it wasn’t.
Despite having bought at auction several times previously, Jamel had not realised he could not choose to lose his deposit and break the contract, the sale had to be completed or he would be sued.
“I felt sick, I couldn’t believe everything I had worked for was under threat because of this stupid schoolboy error.” He didn’t have a legal leg to stand on, his only option was either to complete the sale or try to negotiate a way out.
“I called the auctioneer and I said ‘name your number to rescind the contract’.”
Fortunately for him, the seller agreed to rescind for £15,000. “I had to look at the big picture and losing £15,000 for my sanity was nothing compared to the hassle and stress I was facing,” he says.
Jamel believes the experience has taught him an important lesson: “Losing that money made me determined never to lose money again. I got carried away and didn’t do my homework. I will never do anything on the spur of the moment again, research counts for everything.”
This article appears in the latest edition of the Property Auction Buyers’ Guide, published by EG on 7 October. For free access to more content for private investors, click here to register for your free digital edition of the guide.
