Types of Property Suitable for Auction
Any property can be sold at auction, but some properties sell better at auction compared to a private treaty (estate agency) sale. This article explains what types of property are best suited to an auction sale.
What types of property are best suited to an auction sale?
Most types of property can be sold at auction, but some property types sell better than others. In fact some properties achieve higher sale prices at auction compared to selling through an estate agent, for example properties with potential for improvement or development always generate a high level of demand and benefit from the competitive bidding environment that auction offers.
Updated by Mark Grantham on 6th March 2020
We’ve provided some examples of the types of property that are likely to sell better at auction than through an estate agent.
Non-standard construction properties typically have concrete walls or steel frames. Most mortgage lenders will have restrictions on financing non-standard constriction properties, so selling at auction to a cash buyer can be a good way to ensure the property is sold quickly, without having to wait on decisions from mortgage companies. When calculating a purchase price prospective buyers will take into consideration the cost of converting the property into a more standardised type of construction so that the a mortgage can be secured against the property.
To some people, the idea of owning a run-down, dilapidated property is considered a burden and selling to the first person who’s prepared to “take the property off their hands” doesn’t seem like a bad idea. That’s understandable; there may be worries about the security of the property, the risk of squatters or concerns about the property falling into a further state of disrepair. Also the prospect of selling may seem complicated and uncertain, which adds to the motivation to sell as soon as possible, even if it means reducing the price. Sadly in these situations, it’s not uncommon for prospective buyers to take advantage of a seller’s vulnerability, sometimes in collusion with other parties – we’ve even heard stories about estate agents being involved.
If you’re selling a property in a poor state of repair whether it’s a flat needing cosmetic improvement, or even a fire damaged house in need of a complete re-build, it’s worth remembering that you’re selling an asset, not a liability. There will be people who see potential in the property and it’s important to open the property up to the widest possible audience.
For a property investor, whether they are experienced or first timers, seeing the classic signs of an avocado green toilet suite and worn-out swirl-patterned carpets, even an overgrown garden, are all signals for the potential to make a profit.
In terms of the price you can expect to achieve for a property in poor condition; experienced property investors will be in a position to renovate the property cost effectively, whilst first time DIY’ers will usually underestimate the cost of refurbishment, so end up paying more. In many cases a poor condition property will achieve a higher price at auction than an estate agents suggested asking price.
There are good reasons why mortgage companies (banks and building societies), local councils, housing groups and major corporate property investors “dispose” of poor condition properties at auction rather than with estate agents. The main reason being profit!
We’re often approached by owners of properties with Japanese Knotweed who believe they can quickly dispose of their property without disclosing the fact that the property has issues. Auction is a good way to sell properties with Japanese Knotweed, but sellers should always disclose any issues they are aware of.
It’s quite common to see short-lease properties being sold at auction. In a lot of cases properties (like the lease) have been neglected, which makes them particularly suitable for auction. This is typical if the property is inherited or being sold as a probate sale.
Rather than going through the process of extending a lease prior to sale, it’s most common to sell the property with a short lease, but give the seller the right to extend. This requires the current owner to serve notice (section 42 notice) to the landlord, usually after exchange. Upon completion the seller and buyer execute a deed of assignment which gives the buyer the right to continue with the lease extension process as if they had owned the property for 2 years.
However the lessee can only serve notice if they have owned the property for atleast 2 years. On in the case of a probate sale, Personal Representatives of a deceased lessee can serve a Notice provided that the right is exercised within 2 years of the grant of probate.
For further information read our guide to selling a short lease flat.
A recent survey by MoveWithUs estate agents found that one in ten properties coming to market are probate sales. These are properties that have to be sold and often represent the largest part of the estate. Probate properties are particularly suited to a sale at auction because they usually require some level of upgrading, whether that’s old fashioned décor or out-dated heating and electrics, where prospective buyers see scope for improvement, they see potential.
However, vendors do not always have a choice, sometimes it’s not possible to sell with vacant possession. Some vendors have become “accidental landlords” with no planned exit route, but their personal circumstance might change, requiring them to sell their tenanted property quickly. Rather than asking their tenant to vacate the property at short notice they might feel more comfortable selling with the tenant in place. Or there might be legal reasons why the property has to be sold tenanted, due to the type of tenancy agreement that’s in place e.g. a sitting/regulated/life tenancy.
In some cases the tenant might be occupying the property illegally; whether that’s not paying rent as agreed, or breaking-in to squat at the property. It can be very costly and time consuming to evict stubborn tenants, especially if they “know their rights.” It’s often easier and more cost effective to sell the property with the tenant in place and let someone else deal with the problem – someone who knows how to taken on a problem tenant. Whilst an estate agent might be able to find this type of buyer, the eventual sale price might be a lot less than market value. Within reason it’s up to the investor to pay whatever price they feel comfortable with, they have the control. But at auction the property will find its price from the competitive bidding of the many prospective buyers who are interested in the property. This is an example of the benefit of the transparency when selling at auction.
Request a no-obligation offer estimate to find out more about selling your tenanted property at auction.
Both types of buyer attend auction and as with any property type, for a vacant commercial property where there is potential for improvement there will be a strong demand. But it’s the type 2 buyer, the investor, who sees auction as a trading place for tenanted commercial properties. There are specialist commercial property auctions that cater for commercial property investors e.g. the Allsop commercial property auction will sell around two hundred lots every other month. Prospective buyers are looking for a yield in excess of ten percent (lower in London) along with a tenant with a good covenant i.e. they would favour an established chain shop over a new independent shop.
Banks, building societies and other mortgage lenders want to see that a property represents suitable security, one of the key requirements is that a property can be insured. So if you are selling a property that is unmortgageable due to not being insurable for some reason (e.g. there are structural issues) then it’s worth trying to find a specialist insurance company who can underwrite and insure your property, then you know when you sell the property is no longer unmortgageable, so you’re not limited to cash buyers. If you sell at auction you may be able to include a copy of the insurance schedule in the legal pack so prospective buyers know they too should be able to insure the property.
The list of properties that are considered unmortgageable is quite varied. One of the general rules is that a property must be fit for human habitation, so that obviously includes derelict and abandoned properties. But surprisingly it can be very difficult to obtain a mortgage if a property does not have cooking facilities or a refrigerator. Properties with very dated bathrooms are also considered unmortgageable, if they are unusable. These properties sometimes struggle to sell through an estate agent and are generally better off being sold at auction.
An unusual or unique property can be difficult to value because there are no directly comparable property sales to measure the value against. For example, a very small studio flat in a desirable area, which has been refurbished to a very high standard with smart, space saving utilities cannot accurately be valued on a price per square foot basis, so setting an asking price when selling through an estate agent can be difficult. Where there’s a strong demand for a unique property it can be a good idea to let the market determine its true value and this can be done by selling at auction.
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