Property auctions are not for the faint of heart, as fans of Homes Under the Hammer will know. Bid on the wrong property and there is no going back. Once the gavel slams down, that property is yours, for better or worse. Unlike a regular purchase, you can’t back out of the sale.
Despite the risks, bidding on an investment property atauction could net you a bargain. Homes sold under the hammer are often pricedbelow market value. When a property ends up in an auction, it’s usually becausethe lender has foreclosed, or the owner wants rid as quickly as possible. Manyproperties will need a lot of work, but not all are wrecks. If you’re savvy,you can pick up a bargain and make a decent return on your investment.
Here’s all you need to know about buying a property atauction, whether your plan is to flip the property, or you want to add to yourbuy to let portfolio.
How a Property Auction Works
In the traditional conveyancing process, the buyer makes an offer on a suitable property and for the next 6-12+ weeks, they jump through various legal hoops until contracts are ready to be signed and exchanged. At any point, the buyer can withdraw from the sale process, although they will lose the 10% deposit and the vendor may sue you for damages.
The process is different when you buy a property at auction. There is still legal work to do, but everything is sped up and the buyer has far less room for manoeuvre.
Properties are usually advertised a month before the auctiondate, although it can be as little as two weeks prior to sale day. There is aguide price, which gives you an idea of what the property is expected to gofor, but it is only a guide, and if a property attracts a lot of interest, itcould quite easily make a lot more. Some sellers also put a reserve price on aproperty, which is the minimum they are prepared to accept. Unfortunately, youwon’t be told what this figure is.
On the day of the auction, bids are taken in-person, viatelephone, and even online. The property will sell to the highest bidder. Ifthe reserve isn’t met, it may be possible to negotiate a mutually agreeableprice with the seller after the auction has ended, but don’t count on it.
As with any auction, it’s easy to get caught up in the moment and end up bidding way too much. The auction house will have verified your identity prior to the sale, so if you change your mind, it will cost you a lot of money.
Funding a Property Auction Purchase
Because the timescales of buying a property at auction arefairly short, it’s easier to be a cash buyer. But fear not if you don’t have aton of moolah in your account, as you can still buy an auction property with amortgage.
The standard terms and conditions still apply to mortgagefunding, i.e. you must pass the affordability checks before the lender agreesto finance your purchase. It’s sensible to have your funding in place beforeyou start looking for suitable properties being sold via auction. Any hiccupsafter you’ve agreed to buy the property will be costly.
Speak to a lender or mortgage broker. Explain that you wish to buy a property at auction, so they know time is of the essence. You will have to hand over 10% of the purchase price as soon as the auction ends, with the rest of the balance payable 28 days later. Therefore, the finance must be in place and the lender willing to release the funds by the required dates.
Be aware that the lender may require a property valuation before agreeing to fund the purchase. This could create problems if the property you are interested in is a ‘doer-upper’. In short, it’s best to speak to a specialist lender or broker accustomed to lending on this type of purchase. In addition, you will need to be organised if a valuation is needed prior to the auction.
Bridging Loans for Auction Properties
If mortgage funding is not available in time, your other option is to apply for a bridging loan. This provides a “bridge” between the auction house payment dates and the day the mortgage funding is released.
The main downside to using a bridging loan to fund aproperty auction purchase is that the interest rates are higher than regularmortgage funding. If the worst happened and you couldn’t get a mortgage, you’dbe stuck in a very deep hole, financially speaking. However, if you are certainyou can get a mortgage and you really don’t want to miss out on an amazingdeal, it might be worth using a bridging loan, but do the maths first.
Find a Suitable Auction Property
Once you have your finance in place, it’s time to startlooking for suitable properties.
Contact auction houses in the area you’re interested in.Find out what properties are coming up for auction. Most auction houses publisha catalogue of properties around one month prior to the date of the auction.
Check that the auction house is covered by the NAVA Propertymark. This ensures theauctioneer is registered with HMRC for money laundering supervision and yourmoney won’t be funnelled into an offshore account within minutes of youcoughing up.
Once you have some property catalogues, make a short-list of properties you’re interested in and contact the auction house to arrange viewings.
Viewing an Auction Property
Viewings are very important. Buying a property blind is afool’s errand and you’ll likely end up with an expensive mistake on your books.If you live a long way from the location of the property, it might be temptingto rely on photos and virtual viewings, but this is no substitute for actuallyvisiting the property in person.
Unless you’re a qualified surveyor/structural enginer/builder,it’s wise to take an expert along. You can book more than one viewing, so takeas many experts as you need to ensure you don’t buy a property with expensiveunseen problems. Most issues can be fixed and a lot of properties being sold atauction have more than their fair share, but some are worse than others.Structural problems, such as subsidence, or rampant Japanese knotweed, are allcostly to fix. Houses can be rewired, replumbed, have new roofs and windows,but these all require money.
Make sure your budget covers the work needed in addition to the cost of purchasing the property. It’s pointless buying a cheap house in a property auction if you won’t actually make a profit once essential work has been carried out. Don’t forget to factor in ALL of your costs, including mortgage interest and legal fees.
While the condition of the property itself is relevant, it’swise to pay close attention to the surrounding locale too. Often, propertiesend up in an auction because they haven’t sold the traditional way. This couldbe because the owner is in a huge hurry to liquidate their asset, but equally,it could be because nobody wanted to buy it.
Before you bid, visit the property at various times of the day. Make sure the local area will complement the tenants/buyers of your new property and vice versa – and keep an eye out for all the things that will make it very difficult to let/sell the property later.
Find an Solicitor With Property Auction Experience
Look for a conveyancing solicitor familiar with the auctionprocess. Auction houses send out legal packs prior to sale day. They typicallyinclude local searches, details of fixtures and fittings included in the sale,title deeds, etc. It’s vital that you have a solicitor go through theinformation pack and contracts of sale to ensure nothing nefarious slips underthe radar, such as a right of way access through the garden that belongs to aneighbouring property.
A good solicitor will work fast and meticulously, protectingyour interests and meeting the required deadlines for completion of the purchase.
Conduct a Survey on the Auction Property
Unless you are using mortgage finance to purchase the property, you won’t have to pay for a survey, but since this is an expensive investment, it’s wise to pay for one anyway. Whilst you can’t use the survey to negotiate a better price with the seller, it might save you from making an expensive mistake. Yes, you may not win the property, but forking out £600 for a survey is better than being stuck with a £100k money pit or a property that’s later condemned (note: If your property is condemned you may also have to pay the demolition costs!).
In the case of newer properties with fewer issues, a Homebuyer survey is likely to be sufficient. The surveyor will use a traffic light system to assess all areas of the property: if anything is flagged up as “red”, then it definitely warrants a closer look.
If you’re looking at an older property, it’s better to go for a more in-depth survey carried out by an RICS registered building surveyor. Speak to the surveyor before they visit the property. If you have any concerns about any particular area, such as the roof, let them know.
Investigate Insurance Ahead of the Auction
Have buildings insurance set up in case you are the winningbidder. From the moment you become the proud owner of a property, it’s yourresponsibility. So, if an unexpected gas explosion destroys the propertyshortly after the auction ends, buildings insurance has you covered.
Speak to an insurer prior to the sale and arrange for apolicy to start on the day of the sale. You may not have to pay anything untilyou activate the policy, which you can do as soon as you lodge the winning bid.
Don’t be rushed into taking out insurance via your mortgage lender. This is almost always more expensive. Speak to an insurance broker or search for a suitable policy via a comparison site.
Preparing for a Property Auction
Before you leap in feet first, watch a few episodes of“Homes Under the Hammer” and visit an auction house to see the action unfold inperson. The more familiar you are with how the process works, the easier itwill be when you decide to bid on a suitable property.
On the day, you’ll need to have ID and proof of depositfunds. If you’re not sure what else you need, speak to the auction house beforethe day of the sale, so you’re not caught out by any unexpected requirements.
When you arrive at the sale, register, and grab a seat. Some sales will be busier than others, so it’s a good idea to arrive early if you want a decent seat. Sitting at the back of the auction will give you a good view of the room and your competition. Before the sale of the property you’re interested in begins, make yourself known to the auctioneer and their spotters. Bidders often stand during the auction, so their bids can be spotted more easily.
Set an Auction Budget
Don’t start bidding on a property without knowing your upper limit. The guide price for properties being sold at auction is just that, only a guide. Depending on how much interest in the property there is, it’s likely the final sale price will be at least 10% higher, if not more. Auction houses usually set the guide price low to raise interest in the sale, and it works!
Property Auction Fees
Factor in the auction house admin fee. This can be as muchas £1,000. In addition, buyers are sometimes expected to pay the vendor’s salefees, which can soon add up. There will also be Stamp Duty payable too (3% ifyou’re buying a second or subsequent property).
It’s very easy to get caught up in a bidding war when youhave your heart set on a property, but if you’re not careful, you will end uppaying more than you can afford.
This is strictly an investment decision, so it pays to remain calm and analytical. Decide what your maximum bid is and stick to it. If you lose the property you’re bidding on, remember there will always be other sales and other properties.
When the Reserve Isn’t Met
If the seller has placed a reserve on the property and thereserve is not met, they may be willing to negotiate with the highest bidder.Don’t rush off at the end of the sale if the property you wanted isn’t sold.You could still be in with a chance if you play your cards right.
The ‘Modern Method’ of Auction
The modernmethod of auction is a buyer-friendly way to buy a property via an onlineauction. Some properties are sold this way via estate agents – usually cheaperproperties where the owner wants a quick sale. It’s a good way to snap up abargain investment property.
This type of auction works in the same way as a regularauction, but bids are placed online. The successful bidder must pay areservation fee, which protects them from being gazumped by another buyer withmore money, but they are given longer to arrange finance and complete the sale.
One point to be aware of is thereservation fee is on top of the price you agree to pay for the property,which may attract SDLT. This is not always made clear to the buyer.
What Do You Need to Know About Property Auctions?
You can’t change your mind when you buy a property at auction. Once you place the winning bid, you must pay the 10% deposit immediately, and the balance within 28 days, irrespective of your personal circ*mstances.
In rare circ*mstances, an auction house might be willing to offer a buyer some extra time to acquire the money needed to complete the sale or withdraw from the purchase altogether. However, this will cost you in terms of your deposit, fees for re-selling the property, plus any shortfall in the price you agreed to pay and the price the property makes in a subsequent sale. Some auction houses also charge interest on the unpaid balance. Vendors are also apt to sue the buyer if s/he fails to complete the sale, so be aware that you’ll have to deal with court costs as well as the loss of your deposit plus fees.
Some auction houses let buyers put an offer in before the dayof the sale. It’s worth enquiring if you’re very interested in a property. Thevendor might be willing to sell without going through the hassle of an auction.
Auctions are worth looking into if you have the cash oraccess to mortgage funding. There are bargains available, but it’s very much acase of buyer beware. Don’t bid on a property without due diligence. If you do,it could end up being a very expensive mistake.
Happy bidding!
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