8 Lessons From My Bidding on Land in an Auction
Samuel Leeds here. In mid-February, I bid for a piece of land and thought, why not involve you in the process? Hopefully, by doing this, you'll pick up a few things on how to buy land, how to buy from an auction, and how to bid on properties.
This particular property was about an hour or so from Buckinghamshire, where I live. It already had planning permission to build a one and a half storey bungalow. And while the going price was £115,000, the highest bidding price was £126,500 when we began filming.
If yours is the winning bid, you must buy the property.
Typically, you'll make a down payment of 10% of your bid upfront, then pay the rest within 30 days. And should you pull out of the sale, there could be serious consequences.
Determine if the property is profitable before making a bid.
Note: the highest bid was now £127,000, and only 45 minutes were remaining to bid on the property.
While we didn't how much everything would cost to the penny, here are the estimates I had worked out:
- Cost of building the house: about £160,000, according to my cost manager.
- Soft costs, including architect fees and quantity surveyor fees: roughly £25,000 based on my experience.
- Completed value of the property: approximately £460,000, going by the current market value of similar properties in the area.
From these estimates, it was evident that the property would likely be highly profitable if I made a reasonable bid and won.
Establish a minimum and maximum bid.
I was yet to make my bid. So in order to find the best price range I could buy the land, I subtracted the construction costs, including soft costs, from the property value estimate.
£460,000 − ( £160,000 + £25,000) = £275,000
However, if I bid £275,000 for the land and won, I would not have made any profit and would probably have lost a few quid. So to find the ideal buying price, I made the following calculations:
Target profit: at least £120,000
Additional costs, including auction fees and stamp duty: around £20,000
Maximum buying price: £275,000 − ( £120,000 + £20,000) = £135,000
Don't start by bidding with your maximum bid.
The highest bid was still £127,000, and I only had 39 minutes left to bid. The risk of bidding when there's plenty of time remaining is it may result in people bidding higher and higher, and you don't want that. So you may consider waiting until the last few seconds to place your bid.
I, however, decided to raise the bid to £127,500. Immediately after, I got this notification, “You are the highest bidder.” But I knew that wouldn't be for long as someone else would no doubt outbid me.
Now, I was also expecting a call from the BBC in less than half an hour, so chances are I'd have to multitask. I'd be on the phone while watching how the bidding is progressing and placing a bid just as long as it didn't exceed £135,000.
Don't wait to buy land, buy land and wait.
No one is building more earth, so land value only increases with time. In fact, the best investment on the planet is the planet itself.
Note: at this point, I was still the highest bidder with 22 minutes left on the clock.
Don't set your maximum bid too high just because you expect to make a substantial profit.
I had a brief face-to-face conversation with Russell Leeds, who's my business partner and mentor. And he agreed that £135,000 was a reasonable cut-off price. However, there were concerns that multiple people may have a similar cut-off point. Not to mention, with 17 other people watching the auction at the time, our chances of being the winning bid appeared slimmer.
“What would you say to anyone who's watching this who's thinking, ‘well, if you're gonna make £120,000, why don't you just bid an extra £20,000 and make sure you get it and just make a £100,000?'” Russell posed the question to me.
Here's why not:
- Sometimes the deal is just not worth so much time and effort.
- There are always risks. For instance, there's the risk of a budget overrun. The end goal is for the project to be as profitable as possible. And if you want bridging finance or development finance to fund the construction, you need in excess of 20% profit.
- Why make £100,000 when you can make £120,000?
“Most people watch Netflix … we watch the countdown timer on auction bids,” I said to Russell before he left.
When emotions are high, intelligence is low.
“You have been outbid,” read the notification on my screen after someone else bid £128,000. “You must bid again to stand a chance of winning,” it went on to say. But I wasn't about to make another bid while there was still a couple of minutes remaining.
With 19 minutes left in the auction countdown, the highest bid now stood £128,500. And each time someone made a bid, I was getting emails reminding me that other people had outbid my £127,500 bid. And that's part of their strategy to get you more competitive with phrases like “to win, you need to put a higher bid in.”
And it works, even with me. For instance, although I had set my limit to £135,000 if the bidding price reached that amount, the ego, the machoness, and the wanting to win might make me raise my cut-off price (spoiler alert, I did).
It's, therefore, easy to lose sight of the best number when doing an auction. So be careful not to be emotionally involved when participating in an auction. And this includes online auctions.
Before increasing your previously set limit to up your chances of winning, work out the absolute highest price you can bid but still make a decent profit.
To establish the maximum amount we could purchase this piece of land for, I called Russell. And we agreed that so long as it's an amount starting with a one followed by a 3, we're good to go. So our new and final bidding limit was £139,500.
By the time the BBC call came in, the then-current bid had surpassed my previous limit, i.e., £135,000. Then a few moments into the call, it reached £140,500, which was my cue to leave the auction. By the end of the bidding war, the lot sold for £163,000!
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