If you are in the fortunate position of having cash to buy a property, buying at an auction is an opportunity to grab a bargain – if you go about things the right way.
Get things right and you can secure a property with potential at a great price.
Get things wrong however and you could end up with a nightmare purchase costing you thousands of pounds in losses, costs and fees.
It’s worth noting that there are a number of advantages of being a cash buyer – and not just the opportunity to grab an auction bargain.
So if you have cash and are thinking about buying by auction, what are the things you must know?
Here is a quick run through of the main points…
1. The auction
A property auction is where potential buyers, bidders, bid for properties or lots offered by an auctioneer.
With each lot, the auctioneer sells to the highest bidder – bringing down their gavel as a clear sign for all in attendance to see – unless the bid does not reach a reserve price set by the seller (which is not disclosed in advance to the bidders).
2. The contractual aspects
The binding legal contract occurs on the fall of the auctioneer’s gavel. The winning bidder signs the contract thereafter and pays the deposit, usually 10% of the successful bid price.
Because the contract signed is final and binding, it is highly desirable for a bidder to view the property in advance, carry out full due diligence, have it surveyed, and raise any enquiries or questions with the seller or the auctioneer before attending the auction and bidding.
Auction properties are especially suitable for cash buyers since they are often not mortgageable due to their state of repair or condition or not having a useable kitchen and bathroom.
After a successful bid, a bidder typically has 28 days in which to raise any allowable enquiries about the property or purchase process, pay the balance of purchase price and legally complete the purchase.
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3. The advantages of buying at an auction
Apart from the chance to bag a bargain, an auction has the benefits of transparency and speed.
The sale process is open and clear. As the highest bidder, you know that you will secure the property (subject to any reserve).
There is less opportunity for disreputable sale practices by auctioneers compared to other selling agents.
An auction sale from exchange of contracts will typically take 4 weeks compared to two to three months with a regular sale, known as “a sale by private treaty”.
4. The risks of auction purchases
There are quite a few risks or dangers when buying a property on auction including:
- Paying more than you intend to pay, on getting caught up in the bidding process
- Paying more than the property is worth for any number of reasons
- Buying without knowing about the property’s physical, title, environmental, planning or legal defects, issues or problems – or the full extent of them
- Buying from a dodgy or fraudulent buyer who conceals or fails to disclose problems with the property which adversely affect its value
- Losing your 10% deposit if you are not able to complete, in which case you could also be sued to complete the purchase, losing thousands of pounds in the process.
Although this blog is written on the basis that you are a cash buyer, you don’t actually need to be a cash buyer to buy at an auction.
You will need to have the 10% deposit when your bid is successful, but there is nothing to stop you from seeking a mortgage or a bridging loan to fund all or part of the balance of the purchase price.
If you are looking for third party funding to complete your purchase, this adds a higher level of risk and it essential for you to have at least two alternative routes to raise the completion funds in case your first choice fails.
It is of course highly advisable to seek expert advice from relevant property professionals – such as a mortgage adviser and a property coach – if you are new to buying properties with third party money.
5. Minimising risks and dangers
You can minimise most of the risks associated with an auction sale by viewing the property, more than once if necessary, and conducting full due diligence checks before the auction.
It is essential to get a solicitor to consider and approve the auction contract and all other legal documents prior to bidding.
If no “pre-contract searches” are provided, you should find out from your solicitor whether they are desirable in the circumstances and should be carried out.
Be sure to raise in writing with the auctioneer any questions or queries you have about any aspect of the property and if you do not get a reply or a satisfactory reply, see that as a red flag.
Because of the rule “let the buyer beware”, it is common sense to arrange for a surveyor to inspect the property and provide you with a valuation of the property before you bid on it.
Decide on the maximum you will bid before the auction. Show self-restraint by not bidding above your limit! One way to do that is to have someone with you who can tell you when to stop.
If there are structural problems, arrange for a structural engineer to inspect and provide a report.
If you intend to carry out building works to the property, arrange for your builder to inspect so as to minimise the risk of missing hidden or latent building defects or issues which will increase the cost of refurbishment.
6. The modern method of auction
You should not confuse a traditional auction with “a modern auction” or “a modern method of auction”, also referred to as “a conditional auction”. That is a very different way of selling property, though there are some similarities with a regular auction.
Such auctions are run online and the successful bidder must pay a non-refundable “reservation fee”. This is a percentage of the final price and subject to a minimum which can be as high as £5,000 plus VAT.
The winning bidder is usually allowed 28 days in which to exchange followed by 28 days in which to complete.
A buyer therefore has more opportunity to carry out pre-exchange searches and enquiries and more time to raise a mortgage than with a traditional auction.
However the “reservation fee” payable goes towards the agent’s fee for selling the property and so the buyer ends up paying fees which are usually paid by the seller – adding to the costs of purchase.
There is not much reason to believe that a modern auction is a great way to secure a property bargain. The indications are that it is an effective way for sellers to boost the sale price, with the cost of selling being picked up by the successful bidder.
If you are looking to maximise your chances of getting a genuine bargain, a traditional auction seems likely to be your best option.
6. Legal requirements when buying by auction
Under the money laundering regulations, auctioneers have a duty to identify all bidders at an auction.
Before bidding and signing the auction contract you will be asked to provide two original forms of ID:
- Something with a photograph of you, such as a passport or photo driving licence
- Something proving your address.
You cannot pay the 10% deposit by cash; you can only do so by cheque, debit card or credit card.
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7. Adding value to your purchase
An auction catalogue will usually contain rundown properties or properties with issues or problems.
However, you can also find perfectly good, problem-free properties at auctions – entered by sellers wanting or needing to sell fast.
Generally, you will stand a better chance of securing a good bargain if you buy “a problem property” where you can cure the problem/s for a known and fully researched cost.
- Structural defects
- Poor state of repair
- Poor decorative condition
- Sitting tenants
- Defective legal title
- Short leases.
Once you cure the problem/s, you are likely to add value to the property, giving you an asset worth more than you paid for it – in other words, a bargain.
Buying at an auction is probably the best way to pick up a bargain property fast and to be reasonably confident that the sale process is open, fair and honest.
However, it is essential to thoroughly check out and research any property you intend to bid on – identifying and sticking to the maximum amount you can pay to meet your financial objectives.
If you don’t carry out full due diligence, you can easily end up buying a pup rather than that bargain of the century you hoped for.
Have you ever bought a property on auction? How did the process go? Did you actually get yourself a bargain? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com