The cloud of satisfaction weathers the test of time

Economic history teaches us that all recessions come to a fairly predictable end within a year or so. That means we’re probably half way to recovery already. Unfortunately, the thirteen previous recessions in modern economic history weren’t quite like this one.

The extent of the impact that the current financial climate is having on auction buyers depends on the level of assets an individual buyer has. Just as in the broader housing market, the shortage of long term finance is a primary issue. Property investors that relied on draw down facilities from their bank are also finding their activity hampered as this type of support is either being withdrawn or is subject to delays. Those who need to refinance quickly are finding the majority of conventional lenders are very cautious unless the client has a solid track record. However, there are alternative options that would-be buyers should continue investigating.

The slow down in advances from the banks is at odds with the auction process. There’s no quicker way to buy property than at auction. Buyers aren’t part of a stressful and slow moving chain so there are often great deals for the taking. Once the hammer goes down, the sale is set and there can be no re-negotiations so you can’t be gazumped. This is obviously a huge benefit for many buyers, not least because the date of the auction is known from the outset and the timescale for completion is fixed and legally binding for both buyers and sellers.

Those with cash in the background or a property portfolio that isn’t highly geared are finding the current market offers some great opportunities – provided that they can find a financier that is still able to help them draw down capital within the timeframes the auction market demands. There has been a dramatic surge in auction sales during the first quarter of 2009 as seasoned investors with funds behind them have returned to the market.

Auction Trends
According to the Essential Information Group, the universally recognised authority for data on UK property auctions, February 2009 saw an industry-wide, average sales rate of 74 percent. This is the highest it has been for the last two years with over £330m of property sold, and demonstrates that auctions are successfully bringing together buyers and sellers in a difficult property market. The auction market is bucking the trends seen in the mainstream housing market, where the volume of sales has dropped dramatically. The swiftness of the auction process is appealing to both buyers and sellers.

People are turning to property because they are earning very little interest from the banks. Low reserve prices are also fuelling competitive bidding and this is likely to continue throughout the rest of 2009. Auctions are seen as a reliable barometer of the property market – the first place to reflect changing conditions and confidence.

Bidding on a tenanted property
If you do buy property at auction, do your research before making a bid in order to avoid costly mistakes. I’ve witnessed several instances of investors running into difficulties because they were unaware their new property came with a sitting tenant. EIG statistics indicate that of the 4,534 tenanted properties to turn up in auction catalogues over the past 12 months; approximately 16 percent housed “sitting tenants” on regulated agreements. It is important for auction newcomers to understand the type of agreement in place before they bid on a tenanted property.

Most private properties are now leased under an Assured Hold Tenancy (AST) Agreement. A bidder who acquires a property with an AST will benefit from instant rental return and, if they require access to the property for their own occupation or to undertake large scale refurbishments, they are entitled to take possession when the agreement comes to an end. However, if the tenant was in residence prior to January 15, 1989 they may be on a regulated agreement.

The rights of regulated tenants can create difficulties for investors who are purchasing on a buy to let or buy to sell basis. Rents are often fixed at low levels that are insufficient to cover mortgage repayments and the tenant can only be made to leave if the owner can prove grounds for possession as defined by the Rent Act of 1977.

In some circumstances the tenant can pass the right of occupation on to a relative when they die, and even if the buyer intends to inhabit the property themselves there is no guarantee that a court will grant them possession.

These factors mean properties with regulated tenancies usually sell for substantially less than those with vacant possession. Some investors are prepared to wait until the tenant moves on before they realise the profit from their acquisition, but most new investors will not want their capital tied up for an indeterminate period of time.

Don’t assume a tenant is on an AST. Read the legal pack provided by the auction house thoroughly to make sure you understand the terms of the tenancy agreement and how this could impact on your plans for the property. If there are any points that are unclear then get your solicitor to clarify them before you make a bid.

Bargains at property auctions
If there was ever an example of how bargains can be snapped up in the auction room it has to be the finance we recently provided for a property firm in Bolton to complete a deal on a converted school in Barrow-in-Furness.
The building was a Grade two listed school house converted into 13,500sq ft of superb office space. Two years ago it was treated to a programme of extensive restoration and refurbishment costing £2m of grant money. The property company snapped it up for just £110,000 in the auction room and within three months it was fully tenanted with a rent roll of £66,000 per year.

It was one of the best value commercial property purchases we’ve ever seen and a perfect example of some of the property gems being bought at auction. If the funds are in place, people can take advantage in the current climate.

Outlook for 2009
I am optimistic about the auction market in 2009. Property prices at auction are currently very keen, and with some commentators speculating that we could see house prices stabilising towards the end of the year I would expect auctions to continue filling up with experienced property professionals looking to buy close to the bottom of the market. It is standing room only at some auctions with one person out and one person in. Provided auction prices remain realistic there is no reason the recent upswing in sales performance should not continue in 2009.

For more information:
Telephone: 0844 873 4222 or visit: auctionfinance.co.uk
or write to: Auction Finance Limited, Bracken House, Charles Street, Manchester M1 7BD