We held a property seminar in Stanmore a few weeks ago, and during the seminar I covered some hot strategies for auctions. Simply using one of the strategies, we once made £200,000 for a client within 3 days.
We are combining two of these strategies and putting them into action for our client tomorrow.
One is to look for anomalies in auctions. For example, a property which is in the wrong auction. We have come across a property in Scotland, which is in a London auction. There must be many auction houses between here and Scotland which will probably be more suited for this type of property. This is an anomaly, and for some reason or another it has popped up in a London auction which is probably not the best place for it. The lot we are looking at has a guide price of £60,000. It is a freehold building, consisting of 3 flats and is producing £10,000 per annum. This alone tells you it is extremely underpriced. Comparables show that this property should be worth around £180,000. £177,000 was the last comparison which was about a year ago.
Another strategy is underwriting. A lot of retail investors do not know that you can underwrite stock, meaning you don’t actually buy the property; you only agree to buy the property if it doesn’t sell above a certain price. If it does sell above the agreed price you are entitled to a percentage of the profit; the amount depends on the auctioneer. However, if it doesn’t sell for above the price that was agreed, then you have to buy at the agreed price.
Guided at £60,000, our client has underwritten it for £70,000, this means our client must pay 10% to the auctioneer. This has been done. The investor’s investment is only £8,000 (£7000 plus £900 buyer’s premium). If this property sells for £100,000, he is entitled to 45% of the £30,000 uplift, so that comes to £13,500. So, he will get £13,500 return on an £8000 investment. He will be making 150% on his money, practically, in a day. Although I think the auctioneer will hold on to his money until completion. So, in a month he is making 150%. This is a massive return.
However, you must always be prepared for the worst case scenario. If nobody bids for the property, then he will have to buy the property for £70,000. If this happens, he will get a mortgage for 75% LTV which comes to around £50,000. This means he will only put £20,000 into the deal. The stamp duty will not be that high because of the price. A £50,000 mortgage will cost this client around £2,500 a year. This property is bringing in an income of £10,000 a year, which means our client is looking at a net income of around £6,000 per annum for an investment of £20,000, year on year.
To be honest though, if our client ends up with this deal, then the intention is to separate the leases and sell each flat off locally. We expect to be able to sell these at £60,000 each. It is a small deal, but still we are excited for our client. Time will tell what will happen.