As auction sellers, we have been reminded on a number of occasions in recent years of the Advertising Standards Authority (ASA) ruling, back in 2014, requiring guide prices to be within 10 percent of any reserve price applied at an auction sale.
The practice of applying an unrealistically low guide, primarily no doubt to attract greater interest and subsequently (hopefully) exceed the true reserve, has long been widespread and, despite often strenuous denials, something that many suggest clearly continues to this day.
Only last month, one of our associates made a post auction enquiry in regards to a property that remained unsold, after having been marketed with a price guide of £500k (plus). After being told that the vendor was seeking offer in excess of £725k, the previous guide price and the 10% rule were questioned.
This question, having been escalated to a member of the auction team received the following reply;
“Advertising standard guidelines dictate that a reserve price should not be set more than 10% from its guide price. We follow this rule with all of our properties, although after the auction, there is nothing to stop the seller’s from demanding more”
Are we really being expected to believe that the vendor was happy to take the risk of selling the property for as low as £550k, when the reality was that they were actually looking for at least £175k (or 32%) more? Further due diligence, an updated Land Registry entry not included in the legal pack, showed that the property was transferred just weeks before the auction, for £705k, suggesting the post-sale reserve was surely always likely to be the very lowest possible purchase price accepted.
Questioning the (very low) guides…
Approaching the first major sales of 2023, with all the major auction houses (and many of the regional teams) holding sales at the end of January, or early February, and with growing concerns over a market ‘correction’, vendors were understandably conceding that lower reserves may need to be applied, but, in some cases at least, there were strong arguments to suggest seeing yet more artificially low guides being applied?
There were certainly more than just a few entries that seemed to be very low indeed, but this does not suggest for a moment of course that they wer not genuine. Forced sellers, local authorities and charities are often governed by strict disposal rules and, providing they are offered in a fair and open public environment, are indeed very much entered to sell, simply be required to achieve the best price possible on the day. This is also often the case with liquidations and repossessions too, as whilst the administrator or mortgagee in possession must ensure the best price possible is achieved, it will be often be left to the market to decide what that price may be.
Other properties, particularly those with often huge potential but no confirmed route to achieve this, such as a brownfield redevelopment site without planning in place, may have a genuine low reserve which factors in the risks associated with that property and others, often those with a ‘Grand Designs’ angle, such as Water Towers or underground bunkers, are simply very difficult to price.
Recent Examples?
We have picked two such lots from recent auctions where we questioned why the guides were so low. We can’t stress enough that we are not suggesting auctioneers are not adhering to previous rulings, but rather the importance of finding out why that guide is so low, ideally pre-auction. As a general rule of thumb, if there is no acceptable reasoning, then either the guide is indeed questionable, or you’ve potentially found a great propportunity!
The first was a pair of one bedroom apartments in a former hotel in Folkestone. The flats were in a reasonable state of repair (we have viewed) and the building, which has had some concerning management issues in the past, has recently had the freehold interest purchased by a collective group of existing leaseholders. Granted, with 51 years remaining on the leases they need extensions at some point; could also certainly do with a cosmetic upgrade and the Service Charges are on the ‘higher than average’ side. They appeared to be two of a few units held by the former management company and were being sold off by receivers, so understandably being offered at what many call Below Market Value (BMV)… that concept a separate debate in itself!
However, a largely comparable property in the same building was recently listed at £130k and marked as “Sold” and other comparables in the area are listed at a similar level. Even with the above factors fully priced and accounted for, can a figure of £33,000 (Guide plus 10%) for the lower of the two really be considered a realistic reserve? If it is, then one has to question whether the administrators are meeting their own obligations to get the best price for assets being disposed of, or it the guide artificially low?
In reality, these are difficult ones to value and the decision to price (arguably) artificially low to encourage greater interest, may well be a good one, even if at the risk of selling for the price of an average family car. The building, whilst maintenance issues are now being addressed, is in a poor state of repair and Major Works costs could easily be in the regions of £2-3m plus. With this in mind, it may well be that any valuer using a pretty standard residual valuation model, may well, when taking into full account the potential additional communal costs, conclude a very low valuation and, as a result, the seller has set an equally low reserve.
What was interesting, during the open viewing, was to overhear potential purchasers asking about contributions and rights over communal parts. Whilst valid, the answers to these questions, and many more, could easily be found in the legal packs (predominantly the lease) or publicly available. This only emphasises that information contained in the packs, often supported or expanded through simple on-line searches, is essential in helping you make the decision to commit to an auction purchased propportunity and, if you don’t understand the term, clauses or covenants included, please employ someone who does!
The second property that raised an associated eyebrow was a plot in South West London, which includes a rather large (derelict) unfinished chalet bungalow. The site also has had plans for a terrace of four town houses drawn up, but not submitted. The guide price for this property is just £250k plus, suggesting a reserve of only £275k, if the 10% rule is applied.
We are always suspicious when a detailed scheme is drawn up but planning has not been sought. Whilst this can of course be the result of a genuine constraint or special circumstances, it will perhaps more often follow a negative response to a pre-planning enquiry, with this being a private application that is not typically listed on the public register, or it simply represents a scheme that has very little chance of becoming reality. Given that a quick search of the sites history shows that a wider scheme was previously rejected, both at application and appeal, its seems unlikely that the revised scheme has never been tested.
However, when giving due benefit of doubt and even applying the assumption that the new scheme will not get approval, the existing (albeit unfinished) dwelling could (conservatively) be completed to a high standard for perhaps £250k, with the resulting property valued in excess of £1 million. As such, a guide price of just £250k seemed unrealistically low, when considering that even the worst case scenario would enable the purchaser to at least double their investment.
Again, this may have just be a very good propportunity, but taking the the risk of an undervalued sale from setting the reserve so low, makes this somewhat difficult to believe; when a simple valuation model would suggest something between £400k and £500k to be a more realistic guide. In practice, our own guide has to some extent been proven, with the property achieving £470,000 on the day, which we believe still represents a good deal for the buyer.
So why does it matter?
There is always an argument that guide prices should be, at least partially ignored, and that any potential purchaser must of course do their own research (and sums) before deciding what to bid up to for any lot they are interested in. However, guides are set and they should be set at a price that indicates either what an expert, being the auctioneer or seller’s valuer, expects a property to achieve in an open market, or at a level not less than 10% from what a seller is prepared to accept. Refer to ASA & RICS rulings if unsure…
Many buyers simply need to get a realistic understanding of a likely price and ensure their own plans are achievable before any purchase. They may need to arrange finance, instruct surveyors and/or arrange contractor estimates in advance of any bid; all of which can take considerable time and incur significant costs. Whilst there is always the possibility that any lot offered will attract a number of multiple bidders, which may well increase the hammer price on the day, sometimes significantly so, this does not remove the need for auctioneers to be as accurate as possible and to adhere to the 10% rule.
If the buyer has confidence that the reserve is indeed set in accordance then they must accept responsibility for questioning why this may be the case and increase the breadth and depth of their own due diligence. As the age old saying goes, “if something appears too good to be true, it usually is”.
In practice, we have lost count of the times we have seen auction listings with properties woefully under guided, only to then see the inevitable higher sale prices then being trumpeted as some form of admirable achievement by the auction house, as opposed to perhaps being somewhat embarrassed for publishing such an inaccurate guide in the first place! Granted, this may well have been at the instruction of their client, for the many reasons detailed above, but is part of an auctioneers job not to guide the seller as much as the buyer?
So it seems that, despite it being almost a decade since the ASA and RICS rulings in this matter, the practice of publishing unrealistically low guides with reserves that are in practice often higher than the required 10% variance may well be continuing largely unchallenged. If so, then this is simply not acceptable and challenges the validity of what should be a helpful tool in the auction purchase process. Our industry continues to seek self-regulation, but, it would appear, fails to pick the easy wins in proving to all involved that it is responsible enough to do so.
We should of course, give equal and due praise for adherence and fair practice as well the bad and we appreciate that many of the larger auction houses in particular are already implementing strict procedures. To highlight just one positive example, when instructed by an associate of our own just last year, the auctioneer stated quite firmly their policy in setting guide prices against reserves and were equally clear that there was no room for manoeuvre. It’s important therefore to concede that best practice is indeed in place, but frustratingly it seems at times that not everyone got the memo.
No doubt we may well see further investigation and perhaps further rulings in the future, but in the meantime, we look forward to reviewing the listings and results of auctions across the UK and commenting on the highlights and surprises. In fact, if those with such unrealistic guides should fail to meet what do seem to be particularly low reserves, then we may well be first in the queue with that guide price (plus 10%) offer…. after suitable due diligence of course!
