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3 strategies to maximise profit from your auction property investment

Publish Date: 18 July 2019

By Beth Fox

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3 strategies to maximise profit from your auction property investment

Further reading

5 key due diligence strategies every auction buyer should use

Key differences between property auctioneers and estate agents

How to maximise profit from auction properties

BLOG / 7 MIN READ

Whether you are a Property Developer or Investor with a portfolio of 1 or 100 properties the primary business aim is generally to maximise profit from your investment either in the short or longer term. 
Auctions have always been seen as a great place to secure a good deal on buying a property but if inexperienced bidders get carried away bidding on a popular property they could ending up paying more than the market value! Which is why the key to a successful purchase at auction lies in the preparation.

The best strategies for optimising your chances for maximising profit margins on a potential property investment purchased at auction start long before either setting foot in the auction room for a traditional ball room style auction or registering to bid in one of the growing number of property auctions being offered on an online platform.
The key to maximising your profit opportunities require just a little research and prior preparation in advance of the auction date. These strategies apply predominantly to purchasing residential property but the principles can also apply to some commercial purchases. 
 

Strategies to maximise profit

1. Look for lots where there is something out of the ordinary 
2. Be ready to take action after the auction
3. Calculate the potential added value
 

1 - Look for lots where there is something out of the ordinary 

Location
If you are regularly researching properties coming up for sale at auction it is easy to spot when there is something slightly unusual about a listing. It could be that an Auctioneer is advertising a property that is outside of the geographical location that they usually cover or a very different type of lot. For example, when a regional auctioneer offers a lot that is well outside their usual area and that their following also covers then there may be less competition when bidding on auction day. 

Unusual lots
One example of an unusual lot for an auctioneer would be a primarily residential auctioneer offering a commercial lot or vice versa a residential lot being offered by a commercial auctioneer, and also being offered out of area is even better too. Anything that is different to the expected property types an auctioneer offers regularly can mean less competition at the auction depending on their level of success in promoting the property to a wider audience and more far reaching than typical.
This is not as unusual as you may think due to the nature of how sometimes vendors may want to offer a property through an Auctioneer that they already have a relationship with whether or not the lot is a natural fit in their auction catalogue. The benefits of finding lots like these are that if a regional auctioneer is offering a property that is well outside of their usual area it is likely that there will be less interest and competition for the property as it falls outside of the zone their followers are interested in. The same applies to residential versus commercial lots as the auctioneers following will be geared towards their usual offering resulting in less interest in the lot in question.
 
Search upcoming auctions: quick search auction property

Pre-auction offers
If you have completed your due diligence in advance and are certain that you wish to proceed and very keen to secure a property it is worth approaching the Auctioneer with a pre-auction offer. The auctioneer will pass your offer onto the vendor prior to the auction. Your offer price would generally need to be at least guide price plus for it to even be considered. Some vendors may be very keen to secure the sale and favour accepting the offer on the table over the uncertainty of what may or may not happen on auction day.
You do need to already be fully  prepared to proceed having done your due diligence when making your offer as if your pre-auction offer is accepted you would be expected to exchange contracts straight away.
The benefit to securing a property prior to auction is that you will have agreed a price that you are happy with and you have the security of knowing you won’t be outbid on auction day.

Calculating property values
As part of doing the recommended due diligence checks to decide whether a property is seriously of interest to proceed upon, it is good practise to calculate it’s likely market value so you can consider your bidding strategy and whether it is likely to sell at a level that would leave the required profit margin.
Every property that is offered at auction usually has a guide price though this is not a guide as to what the property will sell for. 
Search comparable property data to help work out the market value of the property using the EIG Auction Insight service search property price comparables
 
Where the guide price is set
Guide prices are one technique used by auctioneers to generate interest so a Guide Price is usually set at an attractively low level to generate greater interest as potential buyers see there may be a bargain to be had. The guide price is only an indication of where the reserve price is set which is where the auctioneer won’t sell below that level. A lower guide price can generate increased competition with the property sometimes actually selling for higher than the average market value, depending on the interests of the bidders on the day.

A high guide price
Conversely, where you spot a high guide price this can immediately put potential bidders off as it doesn’t immediately look like a good deal. This can reduce competition from the outset meaning that on the day, there may be less bidders and it could go for a more competitive price.
The guide price can be changed during the pre-auction marketing period so lots that start with a high guide price may drop if there is low interest and that may be an opportunity to try a pre-auction competitive offer.
When considering properties with both low and high guide prices the most important factor is to calculate the likely value of the property if offered on the open market so you know the value to assess what would be a good deal or not if you were to buy it at auction.   

   
2 - Be ready to take action after the auction

Register your interest on withdrawn lots
A lot can change in the run up to an auction and on average 8% of all property auction lots are withdrawn. The reasons are varied, from the legal documents not being available in time for the auction, the property is offered vacant and the tenant hasn’t left or the vendor has changed their mind and no longer wants or needs to sell the property or many other reasons.
If you have seen a property you like and it is subsequently withdrawn, then approach the Auctioneer and ask why. Depending on the reason for the withdrawal, if you are still keen then it is worth registering your interest on the property as the issue for the withdrawal may be resolved in a timely manner and the Auctioneer may get in touch to offer it to you without the competition of bidding on it in a later auction.

Make an offer on unsold lots
Not all lots sell at auction and while the rate differs from auction to auction, currently around 25% go unsold. This offers an opportunity as the vendor would have been hoping for the property to sell at auction and now they have to decide what to do next. The vendor is still likely to be a motivated seller so approach the Auctioneer expressing your interest in buying it. They will discuss what an acceptable offer to the vendor may be. Find out the auction guide price and at this stage the Auctioneer may disclose the reserve price. Try putting forward an initial offer based on the reserve price and you can negotiate from there. 
You can search for unsold lots on the EIG portal at www.eigpropertyauctions: unsold lots
 

3 – Calculate the potential added value

It is not just the price you pay for an opportunity that defines the potential profit but also the opportunities to add value.

Planning permission
When a property is offered with granted planning permission this will be reflected in the price and the level of interest and competition for the lot. Where there is just the potential for planning permission this is more of an unknown and taking the chance can be a risk but taking a calculated risk can pay dividends.
As part of your due diligence into a property opportunity you can research the likelihood of planning permission being granted and you can approach the local planning department to discuss the possibilities with them  to get a clear picture of what may and may not be approved.   
 
Improving spaces
As with any property whether you buy at auction or through an estate agent upgrading the property always offers an opportunity to add value. Improving the property with modern, quality updates will improve the re-sale or rental appeal for a property. When considering purchasing a property at auction your initial plans will have involved assessing the most suitable options for adding value to the property and costing them out to see if the figures stack up to make it worthwhile. Options for improving a property include the standard modernisation approach of updating kitchens and bathrooms, to knocking down walls to reconfigure the living space following the growing trend for open plan kitchen diner living areas. Investing in these updates can maximise the yield on rental investments as can creating extra accommodation or changes from single to multiple occupancy. Don’t forget the landscaping opportunities too as creating appealing outdoor space can add significant value, seen with the growing trend of adding the convenience of a garden office space and outside. 
 

Want to see what is coming up for sale in your area or what price properties have sold for?

Trial Auction Insight for free online or call: 01737 226150 to speak to an Account Manager for a no obligation personalised tour of the service