Bid to bid at your very best
Originally published in Sunday Business Post June 17 2012
Buying distressed property in Ireland is not a new phenomenon, what has changed in recent years is the volume and availability of bank or repossessed properties, generally referred to as fire sales. ‘Distressed’ describes the state of the seller and not the asset. Most commonly, this distress takes the form of financial distress; a consistent pattern of missed mortgage repayments and no likelihood of making good. Over the past five years, those distressed sellers increasingly end up losing or surrendering their property to the mortgage company. The subsequent sale of the assets by the mortgage company are the fire sales we now see at the multi-lot auctions that burst onto the Irish property scene in 2011. These new auctions brought with them a whole new set of auction rules.
They introduced the concept of a stated ‘maximum reserve price’, rather than using the traditional AVM or Advised Minimum Value. This means that once bidding has reached the stated maximum reserve, the highest competing bid thereafter will secure the property. As this figure is the maximum, in reality, the sellers may accept less on the day. A public auction, by its very nature, is the truest measure of a lot or a property’s so-called market value on a particular day. In the current uncertain market with the prolonged delay in introducing a national property price register, public auction is the only verifiable measure of real market value. However, poor demand on the day can drive down the price, and by extension, the value of a specific property resulting in BMV, or below market value deals for the lucky bidder. In many instances, poor performance at auction is less about the property and more about the lack of strategic marketing in advance by the auctioneer and a failure to attract the right buyers.
These new auctions are on a much larger scale in terms of the actual number of lots offered, but also in terms of bidders in attendance. It is not unusual now to see hundreds of people turning up to large venues to watch in excess of a hundred properties go under the hammer. Buyers who are intending to bid, should bring with them two forms of valid identification and a cheque/draft. In instances where the venues are filled to capacity, entrance may be restricted to bidders only, no spectators, and proof of funds will be used to determine this.
Bidding at these auctions is very different. It is hectic, aggressive and fast-paced. Properties sell within an average of just over three minutes each. It is worth noting here that it is the bidders’ responsibility to make them seen and heard by the auctioneer. It is unlikely that a bidder will be able to watch competing bidders through the crowd so it is always recommended to have an ally in the room. This is the reason why many bidders elect to send in an independent, proxy bidder on the day.
At least three-quarters of all buyers at these auctions are cash buyers. The lead-in time of three weeks, from the date of the catalogue issuing to the auction day, makes it difficult for mortgage lenders to facilitate their buyers. For this reason, mortgaged buyers must be exceptionally orgainsed, have finance in place, select their property and contact their mortgage provider at least two weeks in advance of bidding.
Preparation in advance
The good news for hesitant or inexperienced bidders is that very few bargains are achieved in the auction room; invariably they are achieved as a direct result of the preparation in advance.
1. Buyers should attend the auction of any properties similar to what they are seeking.
2. Buyers should view the property thoroughly, particularly when looking at fire sale assets as the condition of these tend to be below par.
3. Research should be carried out on the immediate and surrounding areas to help buyers ascertain the true value of the property, having regard to the local demand and supply or over-supply as the case may be.
4. Mortgaged buyers who intend to finance their purchase by way of a mortgage must consult with their lender in advance and let them know about the auction and the property being pursued. It is absolutely essential to receive written approval in principle in advance of attending the auction.
5. Buyers are advised to have the property surveyed by a qualified engineer or building surveyor
6. The next step is for the buyer to take up a copy of the draft contract for sale together with the copy title deeds and supporting documentation from the seller’s solicitor and have their own solicitor inspect same. One word of caution, where the contracts and title are not made available until a few days before the auction, this may be strategic and a particularly thorough inspection is advised.
7. The final task before the big day is for buyers to set their ideal price and maximum limit, which is not necessarily the maximum mortgage approval or maximum budget but rather the most the property is worth to the buyer.
On the day
Before the auction kicks off, the seller’s solicitor will read through the essentials of the title and through the special conditions of sale attaching to the property. Queries on title will be dealt with at this stage but no intending bidder should be hearing about the title for the first time five minutes before bidding starts.
When it comes time for the bidding, there are several different strategies that can be used depending upon the value of the property, number of competing bidders and how much is known about the seller and their circumstances. In most instances, it is sensible to hold back and watch the bidding evolve. If there are two or more bidders, it is not necessary to engage. Let the bidders fight it out until there is only a single bidder left. If, at this stage, the price is in excess of the buyers limit, the buyer should not get involved. If the price is still within range, there is only one other buyer to contend with and this is when the buyer should start.
As the bidding continues, it is easy for buyers to lose control. If this happens, it is important to slow things down. Do not make another bid until absolutely necessary. When it proves necessary to make a further bid to stop another buyer securing the property, alter the value of increase, for example, if successive bids have each increased by 5,000 euro, bid with an increase of 1,000 euro. The auctioneer may refuse to accept this level of increase but it is a risky decision for him to take as he may lose the bidder.
Where a bid is successful, the buyer is obliged to proceed with the purchase. The contracts for sale are signed on the day of the auction and legal deposit handed over, usually 10 per cent of the agreed price. There is no equivalent of a ‘cooling-off period’ that buyers of a washing machine on credit might be afforded. Failure to complete the purchase will result in a forfeiture of the deposit and a potential breach of contract litigation. In contrast to this obligation, the seller has a legal right to withdraw at any stage in the process before hammer falls.
Finally, the greatest pitfall for unprepared buyers is that they might actually be successful in their bid and secure the property but not be in a position to complete the transaction within prescribed period of 28 days. If this happen, the buyers should consult with their solicitor as soon as possible.