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Property Auctions - Guide Price Reality - Howard Gooddie

As you will appreciate, I have to start preparing my copy for this article quite a long time before you see it in print, so that by now those of my readers who were either surprised or pleased to see the word fleshed and spoken in my cameo appearance in the middle of September on BBC Breakfast Television and North West News may now have forgotten it. Frankly, if you blinked you will have missed it! If now, my thoughts seem a little scatterbrained this month you will perhaps forgive the flowing of the adrenaline provoked by both the nervousness of having a cameraman prancing around my auction room, coupled with the inevitable "high" with which I leave the rostrum anyway.

I can confess to you, my readers, that the programme did not, I hope, reflect the fact that it was a very unsuccessful auction. As, with my team, I analysed the sale the following morning, that lack of success reinforced the comment that I make so frequently in this column about being very careful of the situation of the properties which you buy. My reserves were low. Generally the condition of the properties was quite good, but they were all in poor situations in areas of low demand. Obviously the knowledgeable audience appreciated that. If you are investing, it doesn't matter how cheap a property is if you can't then find a tenant. If you're buying to occupy or refurbish and resell, make sure it's in a poplar area that will remain popular - or at least be quite convinced it's in a district that is "on the up".

But then again, there were some bargains which, because of the ambience that developed in the saleroom and the resultant mood of the audience, failed to sell. I have subsequently agreed to sell five vacant flats and two flats let on assured shorthold tenancies in a block of 24 where there was also �850 a year in ground rents to collect, at a figure close to the reserve of �60,000. It was the last lot in the auction; sometimes one to watch for, that "tail-end Charlie", if half the audience have by then decamped. Nevertheless, I was pleased to see that the Longden & Cook Commercial logo got a little television exposure; that at least gave me some value from the day.

I am told that quite a few of you find guide prices confusing, and frankly this does not surprise me. The panel of auctioneers of which I am a member, who, under the auspices of the Royal Institution of Chartered Surveyors give advice and guidance notes to auctioneers throughout the country, have been considering the subject very recently. Their view is that guidelines should represent the range of figures within which they expect the reserve will be fixed. They recommend that a phrase to this effect should be included in auctioneers' brochures, wherever guidelines are referred to. Without such caution in fixing the guidelines, unwise amounts can create problems for auctioneers and obviously for would-be bidders.

At one auction local to me (not one of my own, dare I emphasise) a property was withdrawn unsold at an amount considerably higher than the bottom guideline. The difference was so marked that the withdrawal of the property provoked a near riot by the would-be bidders in the room who had been encouraged to attend by a low guideline which was not realistic in the light of the reserve fixed.

In my office, guidelines are quoted to enquirers on the phone but are not published in the brochure, since as you can appreciate there can be many changes in the time between the brochure going to print and the day of the auction. Guidelines that have been thus printed cannot be changed, and yet very frequently the circumstances during the three to four weeks of marketing can provoke a change. There may be a considerable amount of interest in one particular lot, and the auctioneer transmits to the owner various offers which are noticeably higher than the original guidelines. It is only fair then to everybody concerned if all those offers are refused and the guidelines varied to take this into account and probably to take into account that the reserve is raised. By the same token, an owner may originally have fixed a high reserve and during the marketing period comes to the realisation that his expectations are more than the attitude of the enquirers would suggest, and so the reserve is lowered and once again the guidelines need changing. Sellers are not unknown to change their ideas on reserves between instructing the auctioneer, and sale day, entirely without reasonable justification! So you will appreciate that printing the guidelines in the advertisements and the brochure can, in my view, be an unwise move. The increasingly popular internet advertising, of course, has the advantage that the information can be updated on a daily, even hourly basis to accommodate these changes.

The other point I would like you to consider is: why are some properties put in an auction? It is so that open competition for something of particular attraction can encourage bidders to fight for the property. Of what benefit then was the original valuation, as far as the fixing of the guideline was concerned? I have been a valuer, "man and boy", for over 40 years and have been conducting composite auctions for at least half that time. I must confess there are occasions when the advice I have given on value has been proved to be totally wrong by the competition engendered in the room. I very often say to my clients in the early discussions on guidelines and reserves, to their surprise, that it doesn't really matter what I think a property is worth. What matters is how much the two last bidders in the room think it is worth coupled with the extent and desire of the owner to sell reflected in his chosen reserve.

I seem to scatter my articles with clich�s, but do remember the one: "valuation is an art, not a science". All that a valuer can come to is a view of what a hypothetical buyer might pay, based on his experience and comparison of the property being offered with others of a similar nature that have been sold recently. That is almost the point where we reach that phrase, beloved of financial services, "remember that past performance ... etc, etc, etc". My article only last month commented on the property which I offered in three successive auctions, where it could have been bought for under �15,000 at the first auction but did not sell, was offered at a slightly lower reserve at the second auction but did not sell, and yet on the third time of offering, with a lower reserve, strong competition from four bidders around the room took the price up to �24,000. Did somebody then, I wonder, say that my guidelines were "up the creek?" You should have been there for that potential bargain at the second sale.

Many authorities and quite a few Court judgements talk in terms of there being a tolerance of 10% on valuers' accuracy in the size of the figure they give. Some judges have suggested that a larger tolerance may be needed if the property is unusual or the circumstances are unusual. Think how often one or both or those parameters apply in the auction room. I would hope that I never get my guidelines worse than 10% wrong, and the figures are not quoted lightly. Nevertheless, one can find that individuals who have seen something in the property that nobody else has seen, or exceptional demand misjudged by the valuer, drives the price up. And finally, whilst I am being so righteous, it has suddenly occurred to me that there has been one occasion in my life where I had some building land where the reserve was at �1 million. The bidding almost stopped at just under that figure and I was about to withdraw, before several bidders took over and I finally had a record sale of �3.5 million! (No, since you ask, it was not my biggest sale ever!) The local authority who were selling were delighted, but myself, the District Valuer and the valuer employed by that local authority, as we sipped our champagne in celebration afterwards, were a bit embarrassed about our valuations, to say the least. It can happen, with the best will in the world; but if it does happen more than one time out of say two hundred lots, maybe those particular auctioneers should start thinking again about how much care they are giving before the guidelines are fixed.

In case all this has confused the issue even more, I will end by reassuring you that the quoted guideline prices are usually fairly reliable when they refer to a property whose type can readily be seen in the area, or when the valuer has extensive experience in the locality. When the property is unique or even unusual, the guidelines can be intended to serve merely as a starting point for the bidding, and neither the auctioneer nor his audience really know where it will all end. That is what makes auctions of all kinds exciting and unpredictable and where they derive their entertainment value, and property auctions are by no means an exception - but such properties are merely the jam on an auctioneer's business. The bread and butter is provided by the vast majority of standard houses, shops and plots of land that come up again and again and which should attract predictable amounts of cash and be relatively easy to value.

I hope you are still finding the ones - the bargains - that the professionals got wrong.

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