Property auction strategy
Flipping property at auction: check the exit before you buy
A successful property flip starts with a realistic buyer and resale value. Work backwards through the costs, funding and risks to decide what you can afford to pay.
Identify the buyer and the realistic end value
Who is likely to buy the completed property? An owner occupier, a landlord and a developer may assess the same building differently. The proposed work, tenure, layout and price need to suit the buyer you expect to attract.
Use completed comparable sales to support the resale value. The HM Land Registry sold price service and Rightmove’s historic listings help you examine the evidence. Adjust for the differences instead of selecting the highest price on the road.
An agreed sale price is not the same as cleared funds. If your buyer needs a mortgage, the lender must also be satisfied with the property and valuation. A resale plan built around an optimistic asking price leaves little room for problems.
Inspect the property prior to auction
In the original article, I described viewings where concerns about damp and structural movement deserved far more attention than proposed kitchens and bathrooms. Those observations remain relevant: photographs and enthusiasm are not a substitute for investigating the building.
View the property yourself or arrange a competent inspection. Where there are signs of movement, damp or alterations, obtain the appropriate professional advice and cost the implications. A contractor’s refurbishment estimate alone does not establish the cause of a structural problem.
RICS explains the purpose and scope of different home surveys. Discuss the property with the surveyor and follow up recommendations for specialist investigations. Check what the findings mean for insurance, lending and your eventual buyer.
Review the legal pack and the purchase timetable
Your solicitor should review the title, searches, Special Conditions of Sale, any lease and the latest addendum. Establish additional fees, occupancy, rights affecting the property and any restrictions on the works or intended use.
Confirm the auction method and the actual contract. The fact that bidding takes place online does not tell you when you become legally committed or how much time you have to complete. Have the funding and completion monies arranged to meet the specific terms.
Our guide to buying property at auction provides the wider preparation process. A property mentor with auction experience can help you organise the appraisal and recognise questions to raise with your professional team.
Work backwards to your maximum bid
Deduct every anticipated cost and your required profit from a defensible resale value. Include acquisition taxes, auction charges, legal fees, works, finance, holding costs and the costs of selling. Obtain tax advice on your own circumstances.
Maximum purchase price = realistic resale value less all project costs, contingency and required profit.
| Item | Amount |
|---|---|
| Expected resale price | £150,000 |
| Renovation costs | £20,000 |
| Acquisition and selling costs, including acquisition taxes | £10,000 |
| Finance and holding costs | £8,000 |
| Contingency allowance | £5,000 |
| Required profit before tax on profit | £20,000 |
| Maximum purchase price on these assumptions | £87,000 |
At that purchase price, a 10% reduction in the sale price would cut the projected profit from £20,000 to £5,000 if every other assumption remained unchanged and the full contingency was spent. A further £5,000 of costs beyond those allowances would remove it. A modest change can make a substantial difference.
The purchase costs may change with the price, ownership structure and transaction. Recalculate the actual appraisal rather than copying these illustrative allowances into your next deal.
Check the finance and a credible alternative exit
Understand the total finance cost, the term, repayment conditions and what happens if the sale takes longer. Ask your broker about the specific property and planned works. Do not assume a buyer’s mortgage, your own refinance or an extension of short term finance will be available.
Holding the property as a rental may be a possible alternative, but only if the letting requirements, rental demand, cash flow and funding support it. A fallback needs its own appraisal.
Our guide to controlling refurbishment expenditure helps you test the works budget, while our selling at auction guide explains another potential sale route.
Keep the discipline when bidding starts
A busy auction does not make your resale price higher or your contractor cheaper. Set the maximum bid using your own evidence and stop when it is reached.
The Liverpool bidding strategy case study shows a decision to walk away when the price moved beyond the plan. The next opportunity is only useful if you still have the funds and confidence to act.
Develop the judgement behind the appraisal
Dominic Farrell’s property mentorship helps investors develop the research and decision making skills behind an acquisition. For a focused introduction to the process, explore the property auction courses. You can also use the investment checklist to prepare the questions for your next review.
Buying to flip is a business decision. The value lies in the evidence, the price and the execution.
About Dominic Farrell
Dominic is a property investor, developer and mentor, a director of Tuna Fish Property, author of Property Auctions: Repossessions, Bankruptcies and Bargain Properties and host of The Property Auctions Podcast. Explore his experience and approach to property mentorship.
Build the judgement behind your next purchase
Discuss your objectives, experience and investment plans with Dominic Farrell. Explore whether the Property Auction Professional Mentorship, delivered through Distressed Assets, is appropriate for you.
Refreshed from the original Tuna Fish article. Illustrative calculations are examples, not forecasts. Assess the property and obtain legal, tax, lending and surveying advice appropriate to your transaction.
