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How to Set Your Maximum Bid at Auction — And Why the Guide Price Is Irrelevant

How to Set Your Maximum Bid at Auction — And Why the Guide Price Is Irrelevant

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IntroductionWelcome back to the Property Auctions Podcast with Dominic Farrell from Distressed Assets.Today’s episode is about one of the most important skills in auction buying: setting your maximum bid.Not guessing it during the auction. Not adding a bit to the guide price. Not deciding while the clock is ticking and another bidder is pushing you higher.Setting it properly, in advance, based on the numbers, the risks, and the reality of what you are buying.Because here is the uncomfortable truth about property auctions: most people do not lose money because they bought a difficult property. They lose money because they paid the wrong price.A short lease, a sitting tenant, a messy legal pack, structural issues or a refurbishment project do not automatically make a property a bad deal. But they all have to be priced.Your maximum bid is not simply what you can afford. It is the highest price you can pay while still being properly compensated for the risk you are taking.That is the whole game.Why the Guide Price Is the Wrong Starting PointOne of the biggest mistakes new auction buyers make is treating the guide price as if it represents value.It does not.The guide price is a marketing number. It is designed to generate interest, encourage viewings, get people downloading legal packs and bring bidders into the room.Sometimes it is close to where the property might sell. Sometimes it is deliberately low to create competition. Sometimes it reflects a serious issue hidden in the legal pack. Sometimes it is simply not very useful.So the first rule is this: do not start with the guide price.Start with the end value.Start With the End ValueAsk yourself: what will this property realistically be worth when my plan has been completed?That might mean the resale value after refurbishment. It might mean the investment value once let. It might mean the value after a lease extension, vacant possession, planning consent or a title issue being resolved.The key is to start at the end and work backwards.When you buy at auction, you are not just buying a property. You are buying a chain of costs, risks, delays and possible outcomes.Imagine a house listed with a guide price of £150,000. Similar refurbished houses nearby appear to sell for around £240,000.A beginner might think: “Great, there is £90,000 of margin.”But there is not.Between £150,000 and £240,000 sits the real world: stamp duty, auction fees, legal fees, finance costs, insurance, council tax, utilities, refurbishment, delays, unknowns, selling costs and your profit.So the question is not: “Can I buy this below what it might be worth?”The better question is: “After every cost, risk and delay, is there enough margin left to make this worth doing?”The Five-Part Maximum Bid CalculationA sensible maximum bid usually comes down to five parts:The end value.The refurbishment cost.Transaction and holding costs.Risk allowance.Required profit or margin.Once you know those numbers, you can work backwards to your maximum bid.1. The End ValueThis is where many auction calculations go wrong before they have even started.Buyers often use the highest comparable sale they can find. They pick the best house, in the best condition, on the best street, and use that as their future value.That is dangerous.Your end value should be realistic, not optimistic. Look at actual sold prices, not just asking prices. Compare like with like: property type, size, condition, location, parking, garden, lease length, layout and tenure.If the best comparable sold for £240,000 but had an extension, off-street parking and a larger plot, your property may not be worth £240,000 when finished. It might be worth £225,000 or £215,000.That difference can destroy the deal.A £15,000 overestimate on value comes straight out of your profit. In auctions, where margins are often thinner than people think, that can be the difference between a sensible purchase and an expensive lesson.So be conservative with the end value. Not fearful. Just realistic.2. The Refurbishment CostThe second number is the refurbishment cost.This is another area where buyers often undercook the numbers. They look at a tired property and say, “It needs about twenty grand spending on it.”But what does that actually include?A kitchen? Bathroom? Rewire? Boiler? Roof repairs? Damp works? Windows? Plastering? Flooring? Decoration? Waste removal? Structural repairs? Building control? Fire safety works? Leasehold consent?A refurbishment budget should not be a round number invented from the photos. It should be built from the work actually required.And if access is limited, the photos are poor, or there are signs of neglect, you need a larger contingency.Auction properties often come with surprises: leaks, rotten floors, old electrics, asbestos, damage from previous occupants or issues caused by the property being empty for too long.So when calculating your maximum bid, do not use the refurbishment cost you hope for.Use...
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