How reliable are auction prices for valuations?
How do property traders use the auctions?
How do auctioneers use property traders?
9 Langham Court, Park Road, Twickenham is a two-bedroom flat held on a ground lease with about 12 years unexpired and was in “probate” condition in early 2022. (For comparison, Flat 11 modernised and with a long lease was sold in 2021 at £515,000.) On 30 March 2022, a Notice of Claim for a statutory new lease pursuant to the Leasehold Reform Act 1993 was served on the freeholder proposing to pay £54,870.12. On 12 April 2022, the existing leasehold interest was sold for £145,000 with the benefit of the Notice of Claim: roughly in line with the graphs of relative values for residential leases of different lengths. On 28 April 2022, Auction House London submitted the leasehold interest (with the benefit of the Claim) to auction and the hammer price was £178,000. On 14 July, McHugh & Co. submitted the leasehold interest to auction, still with the benefit of the Claim, and the hammer price was £335,000. The property traders made a lot of money.
The Upper Tribunal described similar circumstances in Brickfield –v- Ullah & Ors (2022) UKUT 025 (LC) as a “valuation conundrum”. In that case, on 4 July 2019, a property company had bought a lease of the first-floor flat at 42 Queens Road, Harrow with about 16 years unexpired for £112,000. On the same day, the vendor served a Notice of Claim for a new statutory lease. On 18 July, the lease was submitted to auction with Allsops and Mr Ullah bought for £175,000 with the benefit of the Claim. The value of the existing 16-year lease is an important component of the calculation for marriage value which the landlord and the tenant share: 50% each. In this case, there are two market-tested prices for that calculation, and then there are the well-known graphs of relative values. Large sums of money are in play and generate frequent FtT cases and decisions. The Upper Tribunal had given guidance in Sloane Stanley Estate –v- Mundy (2016) UKUT 0223 (LC) at Paragraph 168 in particular:
- It is likely that there will have been a market transaction at around the valuation date in respect of the existing lease with rights under the 1993 Act. If the price paid for that market transaction was a true reflection of market value for that interest, then that market value will be a very useful starting point for determining the value of the existing lease without rights under the 1993 Act…
Some valuers and property traders started to treat a single transaction of the subject leasehold interest (whether sold at auction or otherwise) as primary evidence of market value.
Valuers disputing whether an auction price represents a true reflection of market value have sometimes been referred to Paragraph 45 of Allen –v- Leicester City Council (2013) UKUT 016 (LC):
An auction is a recognised method of disposal to achieve open market value. Bids are made openly. It differs from an informal or formal tender where prospective purchasers make their offers in confidence and where there is scope for misjudging the market and offering considerably more than the other bidders.
But as was pointed out in Brickfield at Paragraph 33:
- That is entirely uncontroversial. But Allen was a compulsory purchase case in which the Tribunal was asked to decide between an auction sale on the one hand, and on the other a basic residual method (which was noted as being a method of last resort that the Tribunal adopts only with reluctance). The Tribunal was not suggesting that an auction sale must prevail in all circumstances, in the face of all competing evidence.
It is not only short leasehold residential properties which are affected by this “valuation conundrum”. The freehold interest of 85 Willow Vale, London W12, subject to a ground lease expiring in March 2023, was Lot 8 in the Barnett Ross auction of May 2021. There was a published “reserve below £300,000”. There were three important notes in the catalogue:
- The property was recently affected by fire.
- The property was to be insured by the lessee but we are not aware of any insurance in place to cover reinstatement.
- A three bed terraced house at Number 85 Thorpebank Road sold in February 2020 for £760,000.
The hammer price was £513,000. The same freehold property appeared as Lot 4 in the next Barnett Ross catalogue of July 2021, again with a published “reserve below £300,000”, and with an additional note:
- This Lot was offered in our 27 May 2021 auction…the purchaser failed to pay the full 10% deposit and the vendors have treated that as a repudiation of the contract.
Those who attend auctions will know that as soon as the hammer falls, the successful bidder will be asked to sign the auction contract immediately and either pay the 10% deposit, or will have pre-agreed arrangements in place for that payment. Private treaty vendors (and HMRC) treat the contract date as deal done. Auction vendors treat completion and money in bank as deal done. In the Barnett Ross July auction, the hammer price was £426,000 and, according to Land Registry records, that sale completed to a company which Companies House records show as having very little, if any, trading activity. It is the current Registered Proprietor. The same freehold interest then re-appeared in the Barnard Marcus catalogue of October 2021, referring to the lease, the fire damage and “further development potential”. The post-sale statement was: “Unsold, was available at £365,000. No longer available”. Barnard Marcus re-submitted that freehold interest in their November catalogue, guided at £320,000, reported to have exchanged at the end of 2021, price not disclosed, no pending application at the Land Registry. The property traders lost a lot of money.
Some commercial properties are also subject to this form of “valuation conundrum”. 76/78 High Street, Billericay, Essex was a two-storey commercial investment, the whole let to Costa Coffee on a 10-year lease expiring in 2016, a small part of the ground floor sublet to Carphone Warehouse. The freehold landlord obtained planning permission to redevelop with ground floor commercial, two residential floors above and residential rear extension. Termination Notices were served but invalidity claims followed. Carphone Warehouse took their compensation and vacated. Costa Coffee wanted to remain. The landlord company (the property was its only asset) agreed to sell its share capital for £1.4m conditional on terms with Costa Coffee for a new lease of the ground floor with a small part of the rear yard only. The freehold interest was then offered in five consecutive Barnard Marcus auctions from May 2017 to October 2017. May: last bid £1.645m. June: last bid £1.455m and stated to be available at £1.5m. July: stated to be sold for £1.81m. September: last bid £1.07m and stated to be available at £1.25m. October: stated to have been withdrawn from the catalogue before the auction. The share capital sale did not complete. The company revised the planning to keep Costa on a new lease of the ground floor, convert the upper part and roof space, build a new rear extension, sell the residential development rights and keep the freehold investment.
Auction catalogues are typically published about 3-4 weeks before auction day. This favours the full-time investors and the property traders. People who need longer than 3-4 weeks to inspect, obtain advice, agree finance and be ready/willing/able to bid are effectively excluded. Counter intuitively that restricted market does not always result in discounted prices. Some buyers see the opportunity value and do not properly assess, or perhaps see, the risks. They take a chance or two. They are willing buyers but do they satisfy the market valuation tests of acting knowledgeably and prudently?
A property trader wants to buy at a price which reflects all the risks and sell at a price which reflects all the opportunity. Maybe by “turning” or “flipping” the contract, maybe by minimising or removing some of the risk before reselling. In Blendcrown –v- Church Commissioners (LRA/50 & 51/2002), the Lands Tribunal were faced with an issue concerning the hope value for flats held on leases with 46½ years unexpired not participating in the freehold enfranchisement of a block of flats in Hyde Park, therefore not contributing marriage value to the premium payable, but where there was a hope that they would seek statutory new leases at some uncertain time in the future bearing in mind that, if the leases reached term date without such claim, marriage value would have disappeared. In Paragraph 77, the Lands Tribunal stated:
- I would emphasise that hope value is a speculative element of value which does not lend itself to objective assessment. It is essentially a matter of informed opinion…..What we must consider is the subjective view of a hypothetical purchaser…Hope value is by its nature speculative, uncertain and incapable of precise assessment. It is the value now of the chance of a future payment.
The value of properties offering a secure long-term investment with no unusual risks or opportunities for the property traders, should be capable of “precise assessment” unless the personal circumstances of the vendor come into play. Property traders spend a lot of time and effort networking with insolvency practitioners, probate solicitors, estate agents, managing agents, owners of land-banks, corporate break-up specialists, financial advisers and direct contact with property owners, amongst others. They are looking for owners incurring unexpected liabilities or project-cost escalation, failing rent payments, unplanned delays with permissions, licences, etc, difficult disputes, owners under pressure to pay liquid cash to HMRC, beneficiaries, creditors, etc. The property traders often offer a quick unconditional contract with early completion for the vendor to have prompt liquid cash and freedom from whatever risks and problems which exist. They pay a price which reflects the personal circumstances of that particular vendor.
Market value assumes hypothetical parties: both willing and neither acting under compulsion. When valuers make these binary black or white assumptions, property traders can make profits operating in the grey areas where there are different degrees of willingness, knowledge, prudence, and/or compulsion. The vendor of the freehold interest of 85 Willow Vale had been willing to sell at a reserve price of “below £300,000”. The willing buyer who actually completed the contract was willing to pay £426,000. They are not hypothetical people: they are real people motivated by personal reasons certainly colouring their willingness and possibly pressuring the vendor to sell: not legal compulsion, but compelled by personal circumstances which the market will probably never know. It is suggested that that is one reason why RICS Guidance and mortgage lenders typically require a number of price comparables rather than relying on one market price, even of the subject property.
As soon as the auction catalogues are published, the traders look for opportunities for profit. Will the vendor sell before auction? Is the vendor interested in an underwriting deal? The trader makes an offer, usually above the guide price, which may be rejected, in which case the property trader might offer to underwrite a guaranteed sale price: a signed auction contract and 10% deposit paid but the Lot stays in the auction. If the bidding fails to reach the underwritten price, the vendor receives that guaranteed figure and the buyer pays what he was always willing to pay. If the bidding goes above the underwritten price, then, typically, the vendor receives one third of the extra price, the buyer one third and the auctioneer one third.
When it comes to bidding, only the auctioneer knows how many copies of the legal pack have been downloaded, how many internal viewings have taken place, how many offers have been made to buy before auction, who from, how much and how reliable. If the Lot has been underwritten, only three people know: vendor, underwriter and auctioneer. Reserve prices (subject to any discretion which the vendor and auctioneer might have agreed) are confirmed between auctioneer and vendor close to the auction date with the benefit of the auctioneer’s privileged knowledge. Few interested parties? Maybe take the best pre-auction offer. Special interest from one buyer who wants to see what happens in the room? Difficult decision about fixing the reserve.
And the hammer price. Was there a genuine under-bidder? By auction day, the auctioneer and the vendor have that privileged information which the market does not know. The bidders do not even know the reserve price. Is an associate of the vendor bidding? Is an underwriter bidding? Property traders will have taken note of anything going round the grapevine, who else turned up at the block viewing they attended, how the auctioneer answers questions hoping to create as much interest and participation in the bidding as possible: comfortable that there is a lot of interest, or not so comfortable? Hence the guidance by the Upper Tribunal in Brickfield at Paragraph 34:
- We do not consider that either of the sales, in isolation, is reliable. There was insufficient evidence before the FtT to illuminate the circumstances of either…..It might have been helpful to the FtT for there to have been evidence from the respondents themselves, or other witnesses of fact…..Were the respondents persuaded to pay a price thinking that the eventual premium would be modest? We just don’t know; neither did the FtT.
There is an awful lot of skill in being a good auctioneer. The property traders use the auctions and the auctioneers use the property traders.
When development opportunities are valued by comparable evidence, property traders will look at the residual method alternative to find over-valued and under-valued projects. To the vendor they will stress the risks requiring comparable adjustments. To a purchaser they will stress the opportunity for profit, sometimes providing full reports quantifying risks and minimising uncertainties. Many property traders rely on their experience and personal judgment without carrying out the due diligence required of a professional valuer. They often specialise in a certain type or range of risk areas in which their knowledge is often better than most of the professional advisers. Even so, they tend to have an established team of rapid-response preferred professional advisers. They are skilled at making shrewd judgments about whether or not someone is likely to yield to pressure tactics. They give the phrase “acting without compulsion” a different slant to its usual interpretation.
Online price comparisons and information give the physical points of comparison. They do not convey any information about the personal motives of the parties. They give little or no information about those risks and opportunities which are not immediately visible. Valuers rely on one transaction price at their peril. The property trader is always seeking a favourable differential between the market value to the hypothetical party and the price which can be agreed with a real person. Some they win and some they lose.
Also note, Properties AY and U Limited –v- Barham House Freehold Limited UT (2022) UKUT 231 (LC) Paragraphs 38-41