Should I buy a house on auction? Pros and cons - Times Money Mentor (2024)

A boom in house price growth in recent years has led to a surge in auction sales, as buyers seek creative ways to save in their pursuit of a home.

It’s easy to see why. The average price of a home has risen by £39,000 in the past year to £292,000, according to official government figures, with the pace of growth accelerating at the fastest rate since May 2003.

While that rate of growth is cooling, the auction market is booming.

UK-based auctioneer, Auction house Robinson & Hall, told us listings were 10% higher in the first nine months of 2022 compared to the same period in 2021.

Online auctioneer, iamsold, sold 661 properties in September. Co-founder Jamie Cooke said this marked the highest number since the firm was founded in 2009.

We take a look at:

• Traditional-auction-Vs-Modern-Method-of-Auction
• What happens if I pull out after winning a sale?
• Risks of buying on auction
• How to find auction homes
• Can I buy on auction as a first-time buyer?
• How to get a mortgage on an auction home

Can I buy a home through auction?

Property auctions were once the preserve of investors and cash buyers, but they are now accessible to a wider range of homebuyers online and through a mortgage.

Auction properties are now listed on Rightmove and Zoopla, making them easier to find, while you may have more time to secure a mortgage or financing after an auction.

Below we explain all you need to know about buying a home at auction, including the pros and cons and what you need to consider before taking part.

What are the main differences between buying a house through an estate agent and at an auction?

The key difference is in the price. An estate agent will quote an asking price, while at auction the property will have a guide price. This price is typically the reserve or minimum price the seller will accept, but is not an indication of how much it will sell for. The final price will depend on how much a bidder is willing to put forward.

Of course, like homes sold through an estate agent, auctioned properties may also be subject to a bidding war. But the chances are that they will start at a price much lower than the typical market value, which is why you are more likely to make a significant saving.

Properties sold through estate agents may also be in better condition and have people living in them. By contrast, an auction property is likely to need some refurbishment and is likely to be empty.

Every property listed for sale at auction will have a link to the legal pack, which contains details on fixtures and fittings, the lease (if applicable) and other important property information.

The legal pack allows bidders to check out the property in depth before making an offer – unlike buying through an estate agent where you usually receive detailed information after your offer has been accepted.

Finally, the major difference is the speed at which sales are competed. You may only have 28 days to complete an auction purchase, whereas a standard property purchase typically takes three months.

Traditional auction Vs Modern Method of Auction

A traditional property auction takes place either in a room or online over a specified time period.

Properties are advertised online or in a catalogue ahead of the auction. Prospective buyers will attend in person, or make bids over the phone or online. Nowadays, many auctions take place online and not in person.

Exchange of contracts takes place immediately after the auction ends, and the winning bidder pays a non-refundable 10% deposit, or “reservation fee”, which is charged on top of the purchase price. This figure can be subject to change, but will never be more than 10% above or below the guide price. The buyer then has just 28 days to complete on the property, meaning these auctions typically appeal to cash buyers who don’t need to raise finance.

With the Modern Method of Auction (MMoA), usually online, buyers are given 56 days to complete the transaction, meaning they have time to finalise a mortgage agreement; they will have secured a “mortgage in principle” – met the lender’s affordability criteria – before bidding. As with traditional property auctions, a non-refundable fee has to be paid to show buyers are committed to the purchase; in MMoAs, this is usually about 5% plus VAT.

People have to register in advance to attend an online auction and may have to pay a fee. This is usually a fixed charge of £1,000 plus VAT, but some properties may be subject to a buyer’s premium on top of the hammer price, which, if applicable, will be listed in the auctioneer’s addendum, which contains any changes to the pre-sale information.

Read more: A step-by-step guide to buying your first home

What happens if I pull out after the auction?

You can withdraw a bid before the hammer falls, but once it’s confirmed, you will automatically enter a contract.

If you pull out after your offer has won the bidding, you will in effect be breaching that contract, which comes with heavy penalties. Likewise, the seller cannot walk away after this point, so the sale is secure.

As mentioned above, when you win, you pay a non-refundable 10% fee or a reservation fee upfront. If you then withdrew your offer, you’ll likely lose this downpayment and may be liable for additional costs too such as the seller’s fees, and other penalties.

With this in mind, you should always go into an auction with your financing all ready to go. Never bid hoping to “figure it out” later on.

It’s rare that you will be able to escape these penalty fees. The only exception is if you can prove the property was misrepresented – you’ll need legal advice if you’re going down this route.

In general, you face up to three types of financial penalty:

• You’ll lose your deposit or reservation fee
• You may have to cover the other side’s fees too
• You may even be liable for future losses they might incur, such as market depreciation since the contract was breached.

Pros of buying on auction

• You may get the property for a lower price than market value – perhaps if it is a repossession or probate sale
• The sale is likely to complete more quickly – typically within a month
• You will not be in a chain
• Contracts are signed as soon as the auction has finished, giving you confidence the sale will go through

Cons of buying at auction

• You may get carried away and go over budget
• The final sale price may be much higher than you anticipated
• There may be serious structural issues or other defects in the property that could make selling difficult in the future.
• It is hard to change your mind without losing money
• You could lose money if the bank withdraws from the sale. Even if you get your financing in place before the auction, you may still face financing problems.
  These can materialise if you uncover some structural or legal issue with the property after you’ve placed the winning bid. These need to be disclosed to the lender, and at that point they may decide not to lend. This leaves you with no way to complete the purchase.

How to find auction homes

Portals such as Rightmove and Zoopla list properties for sale at auction, while you’ll also find them in local newspapers and through estate agents.

SDL is the UK’s largest property auction specialist, and has properties listed on its website alongside details of upcoming auctions and guides on buying a property at auction. Other online property auction portals include John Pye and Allsop Auctions.

The website Essential Information Group lists all property auctions in the UK, and you can search by area or price.

Can I buy a house on auction as a first time buyer?

Yes, you can. Buying an auction property is not without its risks, but it does offer the chance of snapping up a good deal.

If you are a first-time buyer, it is likely you will be making your purchase with the help of a mortgage. Get an agreement in principle from a lender before the auction, and make it aware that you will need to complete the purchase in a month or two so will need to move quickly.

Can I get a mortgage on an auction property?

Yes, you absolutely can, but only on some auction properties. As a general rule of thumb, mortgage lenders only tend to lend against properties that are in an immediately habitable or lettable condition.

Like any sale, unless you are a cash buyer, you will need a mortgage in principle in place before attending the auction. This is when the lender does an affordability check on you to see if you can afford the mortgage you want.

You then know what your bidding limits are. You will need to stick to this price during the bidding as exceeding it could result in the bank not paying out, and you losing your upfront payment.

It’s also worth having a mortgage valuation carried out on the property before you bid, to ensure your lender is willing to lend on that particular home. If you have it valued after you win the bid, and the lender then values it for less than you won it for and downgrades what it is prepared to lend, you will have to find the remaining balance yourself to avoid losing the upfront deposit you paid.

It is also a good idea to have your own private survey carried out before the auction takes place. This is to ensure you know exactly what you’re signing up for before you make the purchase, so you can avoid any unexpected costs after you collect the keys.

Note: You must also ensure that the mortgage lender you select is able to work to the completion deadline, whether that’s 28 or 56 days. If the bank cannot go this fast, you may need to consider a bridging loan instead.

When planning your budget, be sure to factor in all the added extras, such as:

• Valuation fees
• Stamp duty
• Surveys
• Legal advice
• Removal fees
• Deposits

Note: Typically a lender will not agree to give you a mortgage if the property is unhabitable.

If you wish to purchase a big renovation project, you may need to consider other options, such as a commercial loan instead. Once you have renovated the home, you can then apply for a mortgage instead.

Top tips for buying at auction

• Look out for an addendum
  Read the addendum, or amendment sheet, on the day of the auction. This will detail any mistakes or changes since the original listing was published.
• Aim for probate sales
  Look for properties where the seller is in a different part of the country to the acting solicitor. “This may indicate a probate sale. “Often the vendors will accept a low price in order to ‘move on’ quickly after the death of a family member,” says David Lawrenson, owner of property consultancy LettingFocus.com.
• View the property
  It is important to view every property you are interested in bidding on prior to auction. Contact the auctioneer to arrange this or attend an open house.
  A physical viewing is not always possible, but auction houses are likely to offer video tours of the property online.
• Read the legal pack
  Go through this carefully and consider getting a solicitor to read it too. Expect to pay a fee of a few hundred pounds for this service.
• Check local house prices
  Even if you’re a cash buyer with a big budget, always make sure you note down local house prices in the area where you are looking to buy. Auction sales are picking up momentum, and the last thing you want is to win the bidding but then find you have spent more than the home is worth. When working out an accurate value for the property, you will need to consider the cost of any improvement works too.