A good friend and fellow property investor asked me to join him at an auction yesterday to look at a great development opportunity in Belgravia. It was my first auction since all the trouble started in the summer of 2007 and the moment I walked in I knew that my email to you would need to change. You see where I could easily quote some facts and figures on why the London market is heating up I now had in front of me all the social proof one could ever need. A room full of buyers ready to show me through their actions just how well the UK housing market is actually doing. So what did I learn?
Lesson 1 - London has a serious lack of housing stock
The first thing that struck me as I walked into the room was how many people there were. Every available seat was taken and bidders were lining the walls on both sides and standing 3 deep at the back. Not what you would expect during a housing crash. Now my first reaction was that these must all be either professional landlords or American tourists lured in by the free chocolate biscuits in the foyer. But then I started looking around the room and noticed how many couples were in attendance, some with small children on their laps. You could easily spot the younger first time buyers because most were accompanied by their own, more mature parents – maybe only being able to bid thanks to the “Bank of Mom and Dad”.
Easy right – everyone was there to snap up a quick bargain, give it a lick of paint and move in. Problem is I have seen what many repossessed properties look like by the time they go up for auction and most require a lot of work. Do people with small children really want to live on a building site for months to come? Do the young first time buyers look forward to spending their weekends replacing bathroom suites and ripping out rotten kitchen cupboards while their friends are partying? Or is this simply these buyers only hope of getting in the market at a price they can (almost) afford?
London simply does not have enough property to go around and this supply and demand imbalance will keep prices strong and rents up.
Lesson 2 - Many people hoping to snap up a bargain don’t know what they are doing.
The couple next to me were full of bravado, even giving the guys on their other side of them some “text book” auction advice. Only when the bidding started did they not understand that some of the lots where only freehold ground rent investments (the land the property is built on) and not actually a physical property. When a property with a regulated tenancy sold for a song they oohed and aahed about the price not realising that the buyer would not be able to get the tenant out or up the rent for years to come. My calculation put the current yield at 2%.
On a few occasions I was convinced the auctioneer was taking bids off the wall. This is where the auctioneer bids on behalf of the vendor. He is, by law, allowed to bid on behalf of the vendor up to, but not including the reserve price or beyond it. If you are the only person interested in the property it’s often better to let it go unsold at the auction and then make the vendor an offer after the fact. But quite a few inexperienced bidders get caught out and pay more than they need to thinking someone else also wanted the same property.
Bargain hunters are often caught out by their own desire to “get a deal”. If you don’t know what you are doing put your pride aside and ask. You may get lucky but more often you will lose money.
Lesson 3 - Properties at auction almost always sell for more than it should
Simple fact - when you bid against moms and dads you will lose! They bid based on the emotion of buying their dream home with the big garden for little Jimmy to play in. You bid from a rational viewpoint, based on figures and simply can’t compete because you have a maximum amount you can bid after which the deal no longer makes sense. There’s no price on little Jimmy’s happiness and no-one knows this better than the auctioneer.
Lesson 4 - London’s Pro’s are back in the game.
You could spot them a mile off. They didn’t have any of the false bravado or the look of bewilderment in their eyes. They where calm, collected and knew exactly what they came for and at what price. When the auctioneer chased the price up too quickly or tried to convince them to bid “just one more time” they would simply shake their heads or cross their arms. The Pro’s. Those who bought when others where selling, sold when others where buying and who are now stocking up for the next upswing.
Lesson - follow the money. If you want to be successful in this game forget about what the herd is doing and follow the example of the successful investor.
Wishing you health, wealth and happiness,
Mike Smuts
Property investor and MD of Smuts & Taylor.
As all my regular readers will know I normally update you every other Tuesday on the UK property market - which technically means you should have heard from me yesterday. I had a great article ready to go with some great stats and then yesterday at 11am it all changed. Let me explain… 