Why Auction Due Diligence Stacks the Odds Against You
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This document is an excerpt from one of the chapters from a book called: THE TRUTH ABOUT PROPERTY written by NRLA trainer, Henry Davis, www.henrydavisproperty.com
I want to start by trying to highlight the fact that the odds are stacked against buyers.
Think of the auction house as a bit like a Casino, where the odds are stacked in favour of the house. Because of the lack of disclosure requirements under current legislation, the odds are firmly stacked against buyers.
One of the key legal differences when it comes to due diligence between auction sale and a conventional sale, is that pre-auction legal enquiries can be raised by your solicitor with the buyer, but the seller is under no obligation to respond, and, if it’s a problem property, it may not be in their interests to do so. This is the key reason why the odds are stacked in favour of the auction house and are one-sided, effectively passing on all the risk (and normally the cost) to the successful bidder.
Auction clauses further protect sellers by saying that anything not included in the contract cannot be relied upon if they turn out to be inaccurate.
Another common dilemma of buying at auction poses the question of whether you want to pay for legal advice for a property you may or may not win.
Unfortunately, although I strongly recommend you do not do this, in reality, most take the risk. They end up buying lots without knowing the true facts due to understandably being reluctant to pay for legal advice without the security of knowing they will win any of them. This further pushes the risks on to buyers who are in a difficult position of not wanting to spend on legal fees for a property they may not win. I strongly recommend you resist the temptation to buy in this way as it will come back to bite you!
But, like all risks, where there are risks and uncertainties, there are also rewards. The trick is, believe nothing you read in the catalogue, and be extra cautious and thorough with your due diligence.
You cannot rely on the information provided by the auctioneers being correct. The terms and conditions usually stipulate, “Buyers are to rely on their own searches”, and with this in mind, you should always carry out your own checks before purchasing.
I’m not saying an auction is not a great place for a bargain; there are bargains to be had. But don’t always assume you’re getting a bargain, just because it’s in the auction.
From my experience, some lots seem to go cheaply with at least 30 to 50% achieving higher prices than they would should they have been sold via a conventional Private Treaty. I have no statistical evidence to back this up, however. It is merely my view based on my own experience valuing and trading in property over three decades.
One important statistic to remember is that according to the platform which provides the (back end) management software for 98% of all UK auctions, i.e., EIG Auction Data, 30% of all properties have already been previously sold through auction.
These are often what I call “recycled bad ones” which are problem properties, often being unable to obtain mortgages, and some even unbridgeable (unable to refurbish or do anything with). These properties are recycled, in-and-out of the auction “Merry Go Round.”
Auctions do, however, have their downsides in terms of lack of transparency and the challenge of de-risking. I would argue that the current level for protection for buyers is reasonable given it’s an auction sale, and as a professional you will have the opportunity to solve those problems and complications, and then add value.
On the auction Merry Go Round, I’ve often seen the same properties advertised a few times in a short period of time as problem properties get sold over and over again to unsuspecting buyers who effectively buy blind. These buyers do little or no due diligence and the cycle then repeats itself when each new buyer of a troubled property gets caught out buying a ‘bad one. Then, they can simply re-advertise the same troubled property without disclosing its problems or sales history from another auction, knowing there will be plenty more unsuspecting buyers like them who have also completed zero due diligence. The only way to check how many times a property has been through the auction is via EIG Auction Data, and of which I would estimate 95% of bidders won’t have accessed.
Henry is the CEO of We Buy Any House and Genii Developments Ltd and a developer for over 32 years. He is also an accredited Property trainer for the National Residential Landlords Association.
Copyright, Henry Davis. www.henrydavisproperty.com