– Originally published in the Sunday Business Post, November 4, 2012
Earlier this week I was lucky enough to take part in a round table discussion about property auctions, their success and how to encourage home buyers to get involved.
The general consensus from the property people around the table was that the unprecedented growth in the auction arena is positive. It is a good thing for the market, providing much needed transparency, but more importantly, it is a good thing for both buyers and sellers. But auctions do carry a higher level of risk and disadvantages for both parties. The obvious con for sellers is that, in most instances, they will need to commit to an invitingly low advised minimum value, or AMV, and this can be risky if the right bidder is not in the room. Unfortunately, the cons for buyer are much greater. The traditional auction process is entirely stacked against them. They undertake the risk, they have limited time to prepare and they also had to deal with ‘phantom bidders’, which is the legal practice of the auctioneer taking bids from the wall until such time as the real reserve price – which may not be communicated in advance – is reached. The good news for buyers is that with genuine preparation in advance, much of the risk associated with buying at auction can be managed and minimised.
The basic preparation must include valuing the property, having a structural survey carried out, organising finance and having a Conveyancing Solicitor examine the title. This is increasingly difficult as the lead-in time gets shorter – I have raised the question as to whether or not this short lead-in time is strategic, particularly when viewings and access to the property is limited. Irish buyers welcomed the new style of auctioning properties, which we saw first in early 2011. UK company Allsop introduced an alternative to our traditional AMV, called the minimum reserve price. This minimum reserve figure is the guaranteed price that the sellers will sell for, the actual sale price in and above that depends upon bidding in the room. This makes sense and it is difficult to picture any other way, however, in the past, Irish auctioneers had developed a practice of not closing deals in the auction room and ‘retiring into talks with the highest bidder’. By doing this, they were leaving the transparency of the auction behind and forcing the highest bidder to bid against himself – this was unfair and illogical. Luckily, agents are moving away from this now and this is in no small way as a result of Allsops entering the Irish market.
While there are many issues and pitfalls arising from buying at auction, there can be no doubt that it is one of the best ways to secure a bargain but only if you know what the value of the property is. Obviously competitive bidding inside the auction room can drive up prices, however, the true test of so-called market value is whether in fact that property could be sold on within a reasonable amount of time without taking a loss. What we have seen from the last two years of multi-lot auctions, is that investors are going for the low-hanging fruit. They are honing in on the city centre apartments, despite knowing that there are several years worth of supply, both finished and unfinished, still sitting with NAMA and the various other mortgage lenders. The problem with buying in developments that are largely under the control of the bank, is that as more and more units are drip-fed to the market, the vacancy rates increase. In order to combat this, the rents are reduced. It becomes effectively a race to the bottom. In reality, very few private landlords can compete with the banks. One saving grace here is if the area is one where capital appreciation within the next cycle can be assumed (if such a thing can ever be assumed in the Irish market), for example, the Grand Canal or Docklands area.
The majority of investors at auctions, particularly the large, multi-lot events that we have seen recently, tend to ignore those older houses outside the city centre. This creates a great opportunity for home-buyers, including first-time buyers to get involved. So, what is keeping them away; the larger auction rooms are intimidating, but what of the one-off sales? Just this week, respected firm, Lisney, reported their ‘auction success with no distress’ as a badge of honour. The implication surely being that distressed property is somehow lacking. The practical reality is that ‘distress’ is a very wide term. Anyone who wishes to sell their property quickly may be accurately described as ‘motivated’. If this motivation is financial, they become distressed. It is in no way a reference to the property but rather the circumstances of the seller. Buyers have long benefited from learning the sellers’ circumstances and knowing how best to manipulate them. The emergence of bank/Receiver sales to the open market simply makes this process easier to access.
Auctions are undoubtedly the way forward, we have known that for at least two years now. What we need to do next is offer support to inexperienced buyers who need to buy well and open up the auction market for all buyers.