Benjamin Tobin, chartered surveyor and director of Strettons, has been selling properties by auction since 1979. Each month he has corrected our common auction misconceptions, giving us the real answers from the Rostrum, but now he opens the floor to your questions…

What differences are there when bidding for a distressed property at auction? Has Strettons seen an increase with distressed properties at auction recently?

A Google search for “distressed property” reveals definitions along the following lines: 

“Property under a foreclosure order or advertised for sale by mortgagee. Distressed property usually achieves price much below market value.” 

I would agree with the first part but certainly not with the second – our experience is that letting buyers know that we are selling for mortgagees or receivers always creates strong interest and, after all, we only need two bidders to have competition.  

Apart from anything else, if the asset is properly marketed then the price it sells for should be market value, even though it may be less than the historic market value, an earlier purchase price, or the borrower’s perception of value.

Of course, the material words here are if the asset is properly marketed. Should it be marketed by auction or private treaty? Should there be some enhancement such as rubbish clearance, resolving planning or getting rid of squatters etc?

As an indication, the Guidance Notes for Property Receivers issued by NARA (The Association of Property & Fixed Charge Receivers) state that:

“There is a specific duty to obtain a proper price, or the best price reasonably obtainable, on sale… this means the best price obtainable in the circumstances and is not necessarily the highest possible price.” 

The RICS has a similar view, in the Red Book (the valuation “bible”), which states that market value is …the “best” price reasonably obtainable by the seller and the most advantageous price reasonably obtainable by the buyer.   

“Best” is not the same as “highest” and allows consideration of other elements of the transaction, such as any conditions attached to the offer or the anticipated speed of completion to be taken into account.

The Red Book continues:

“Although market value will always be the yardstick by which the reasonableness of the price obtained by a receiver will be judged, there may be circumstances where a receiver is justified in accepting a lower figure. An example may be where the costs of securing and maintaining the Asset in receivership are relatively high, and accepting a discounted price in return for a quick sale may result in a higher net realisation.” 

The main difference between sales of distressed and non-distressed property at auction will come down to the seller’s intention, which usually means price. Where a catalogue advertises that a sale is on behalf of a receiver, liquidator, mortgagee etc, the likelihood is that it is priced to sell and this is always an attraction to buyers who “sniff a bargain”. 

There can be a downside; frequently background information can be limited which means that buyers are taking a little more of a risk. Conversely, it may indicate that there are problems which need to be resolved and while owner occupiers may not want this, most investors see it as a challenge and thus an opportunity to add value. 

Perhaps in such cases it is important for the buyer to check that the auctioneers are chartered surveyors governed by the RICS Code of Conduct and also, where the sale is by a fixed charge receiver, that the receiver is registered under the IPA/RICS registration scheme, rather than merely a member of NARA. 

As to whether there are more distressed properties coming to the auction market, Strettons isn’t noticing an increased flow of distressed property instructions; indeed if anything, it has decreased over recent months.   

Against that, I am certainly seeing more LPA receivership appointments from bridging lenders, although this may be a function of the market; at the moment the traditional lending market is so tight that many borrowers have no alternative to using bridging. Other major firms of receivers who instruct us to sell auction properties also seem to be getting busier so perhaps the coming months will see a greater flow. 

If it is any comfort, we are not alone - at the beginning of the year, the RICS Q4 2011 Global Distressed Property Monitor reported that across the globe:

• Demand for distressed property rises in more countries than in Q3;
• Supply is still expected to rise in the majority of countries;
• Supply of distressed property expected to rise at the fastest pace in Europe. 

Benjamin Tobin

Strettons 

Copyright 2012