From time to time Andrew Idle Associates are retained by clients who are interested in bidding for commercial properties due to be sold at auction.
From my experience of such situations I have the following observations and pointers:
- Don’t leave it until the 11th hour to appoint a Chartered Surveyor – plan ahead and get us involved from the outset. The same applies to your solicitor – they will need to vet the legal pack in good time as often matters come to light where clarity is required before you can bid with confidence.
- It is far better if you get a fee budget agreed with the acquisition surveyor sufficient to cover an inspection of the property prior to the auction. Sometimes auctioneers don’t inspect the properties they are marketing or fail to inspect and describe them accurately, and so erroneous information is stated in the catalogue.
- A thorough survey well before the auction will give chance for any queries like this to be ironed out. A common one is confusion as to whether the original title to the property has been split, with the upper floors disposed of in the form of a flat conversion or whether in fact the upper floors are intact and ancillary to a retail unit, for example. Title Plans provided by the auctioneer in the legal pack may not be explicit.
- One reason for a naked eye inspection is that sometimes properties offered at auction look visibly neglected even though they are supposed to be on full repairing leases. This might well indicate they have not been properly managed and that relations with the tenants, once the buyer takes over, will be strained, at least initially, until maintenance is rectified.
- Make sure you have funding in place before you bid. I have come across a recent scenario in which an investor had planned to utilise another property as security to borrow part of the purchase price, but the panel bank valuer down-valued the property to be held as security significantly. This could have left the buyer high and dry as by the time the bank produced the bad news the investor had already exchanged contracts and handed over their 10% deposit! As it happened, they were still able to manage with the loan offered.
- If buying through a self-invested pension fund, make sure that the property has been packaged appropriately so that it doesn’t contain a residential element. It is best that where the upper floors have been split off and sold as residential lots, these are totally independent of the ground floor retail, to cite a common example. If the freeholder of the shop generates a ground rent from the flats then my understanding is this would be treated as a residential element and would preclude it being bought as a whole and put into SIPP – it would have to be split.
- Be wary of a sale where the tenant was effectively the seller prior to the sale. Sometimes rents are over-stated by comparison with market levels and whilst this means the tenant will be paying more than they should to buoy up the bidding on the property, the buyer of the investment may well find that they cannot uplift the rent for many years because the initial level is unrealistically high. So get your Surveyor to check out the rental stated, if it is a recent lease transaction and make sure it stacks up sensibly.
- Treat an auction purchase strictly as a business proposition and have in mind a limit as to how high you or your acting surveyor will bid. And seek your surveyor’s advice on this. Until recently it was possible to acquire some below market value buys at auction up in the north of England due to a lack of liquidity amongst investors, but this is changing.
Sometimes properties end up selling at a big margin above the guide price especially if the lease is for over 10 years and it is within the sub £500,000 bracket. This may well mean the chance of future capital appreciation is very limited and you could find that you have to keep the property for let’s say 20 years to generate a good pay-back from it. Property is, of course, a long-term asset, but some investors are seeking capital uplift in a far shorter time than that.