Paying 33% Too Much at Auction – Irrational Exuberance
One of my mentees who is a complete novice to both property investment and auctions, bid live online yesterday at an auction in London. She did the research, formalised her thoughts, we identified the reserve and the maximum bid, and off she went. In this case, the seller was not accepting pre-auction offers, which is our preferred option in this current market.
I watched from afar. I was out with my family having an early supper and we all crowded around my phone as we watched the bidding going on. The live auctioneer did very well to whip up the bidders so late in the afternoon. Our lot came up and my young kids got excited.
Very quickly the bidding took off. I identified three bidders. My mentee rightly dropped out at the maximum bid and let the other two bidders slug it out for another few rounds. They were like boxers trading blows in the middle of the ring, adrenaline flowing and both wanting to win at all costs.
At this stage I was texting my mentee with words like insane and nuts as the price rocketed. The bidding closed 33% higher than our very considered and thoroughly evidenced maximum bid. It was exhausting just watching it, and my 12-year-old who knows a thing or two about property and viewed the lot said, “Daddy, that’s way too much.”
There are many lessons to be learned in the after-action review as we call it in the Army:
1. Get your valuation nailed using either income capitalisation or comparables (Chapter 4 of my book).
2. Set a maximum bid based on research and all costs, including auctioneer’s fees, any Special Conditions of Sales fees, bridging fees, legal fees, SDLT etc….
3. Ensure you know the cost of any refurbishment/renovation BEFORE you bid.
4. Be disciplined; it is not a boxing match, and you do not have to win at all costs.
5. Never overpay.
The buyer of this property would have got a better deal in the retail market buying from an estate agent, Rightmove or Zoopla. Even this morning, in the cold light of day, I do not understand why two bidders would get the price so high relative to the rent and its true market value. I do not think they were residential buyers, which would be an explanation.
This is not the first time I have seen this over the years buying and selling at auction. It was a fantastic education for my mentee who was professional and disciplined throughout. Today, we will dust ourselves off and go again.
Remember, it is not a race.