In 2014, the value of the UK commercial property sector rose 15%, to £787 billion. According to the British Property Federation’s Property Data Report 2015, this growth was driven by investors being willing to pay more for a given rent, thanks to a recovering economy and a growing confidence in the commercial sector.
With over half of the UK’s commercial property rented by business occupiers, and GDP growth predicted to be around 2.4% this year, (driven by consumer spending and business investments), buying commercial property should prove to be a profitable and relatively safe source of investment this year.
Whether you want to buy a commercial property for your own business to operate out of, or to add to your investment portfolio, you may want to consider auctions as a way of purchasing, as they are becoming more and more popular as a way of both buying and selling commercial property.
However, buying a property through an auction is not for the faint-hearted or the ill-prepared. Once the hammer goes down, you are contractually liable to purchase the property, so beware of scratching your nose at the wrong time during the bidding process!
To assist you with purchasing a commercial property at auction, I have created a step-by-step guide which explains the process. In addition, I have outlined common pitfalls that you must look out for when buying property through auction.
Step One – Prepare, prepare, prepare
“Give me six hours to chop down a tree and I will spend four sharpening my axe”– Abraham Lincoln
Buying a property at auction is a much faster process than purchasing in the traditional way. My advice to first time auction buyers is to attend a few commercial property auctions as part of your preparation process so you can get a feel for how the process is run.
You need to find a property agent and a lawyer who is experienced in auction sales and can guide you through the process and ensure you do not commit yourself to a premises that is not suitable for your needs, or that you will have a hard time tenanting.
Most auction houses will provide both online and printed catalogues a few weeks before an auction takes place. Before attending an auction, you will need to identify properties that are of interest to you (known as lots) and visit them in person if at all possible. When visiting the premises, make sure you take a builder, architect or engineer with you. They will be able to spot any potential problems with the property’s structure or physical features and let you know how much repairs may cost.
Properties you are interested in may have a guide price, but beware, these prices may change during the marketing process.
Legal information about a particular property will be available to download. You need to provide this to your solicitor, so he or she can perform correct due diligence on the property by checking the title, carrying out searches on the property, identifying how the property can be used, looking at future plans for the local area, identifying potential issues with water / drainage at the property, if there are any environmental matters to be aware of and so on
Potential Pitfall
Make sure you check whether or not you need planning permission for the commercial use of the property. If you are going to use the premises for your own business, you need to be aware that planning permission is often required for, ‘change of use’. For example, if you wish to turn an existing office into a restaurant, you will need planning permission. This is where investing in experienced legal advice really pays off, as planning permission can be expensive and often takse a long time to be granted, (depending on the complexity of the matter). You do not want to be faced with having to gain planning permission unexpectedly after you have purchased a property, and there is always a risk that your application might be rejected if it does not fit in with the local authority’s plans for the area.
Step Two – It’s All About the Money
If you successfully bid for a property you will be required to put down a deposit (usually 10% of the purchase price) right after the auction ends. In case you have forgotten, once the auctioneer declares the property, “Sold”, there is no going back; you are legally required to follow through with the purchase. Otherwise, you risk losing your deposit to the seller of the property and could also be sued for breach of contract.
Guide prices can change right up to the day of the auction, and the property may end up going for much more than the final guide price, so ensure that you have a realistic budget in place and obtain a ‘decision in principle’ from a lender if you require a commercial mortgage. Your solicitor will need to advise you on the terms and conditions of any mortgage you intend to sign up to.
Step Three – Beat the Crowds
If you have decided that a particular property is perfect for your needs, it is possible to put in an offer before the auction takes place. You will need to make an offer to the auctioneer in writing. He or she will then consult with the seller, (much like in a traditional property sale). If the seller decides to accept your offer, contracts will be exchanged immediately and you will be required to pay a deposit. The remaining balance will need to be paid on the completion date. This date can vary but is usually twenty working days after contracts are exchanged.
Potential Pitfall
If you do not pay the balance of the amount owing on the property by the completion date, the seller has the right to keep your deposit and then re-auction the property for sale..
Step Four – Auction Action
You do not have to attend the auction in person, you can send your solicitor or agent to bid for you, or place your bids by telephone or even online. Make sure you have all the information you need regarding the property you want to bid for, and check the addendum to the sale for any changes that may have occurred with regards to the property and/or its sale, as if you bid successfully, these will form part of the memorandum of sale. This is the document that records the terms on which the property will be sold to you, including the final purchase price and completion date.
Potential Pitfall
Make sure you check that the property you are interested has not been sold or withdrawn prior to the auction. This will save you a lot of wasted time and effort.
Step Five – Bid like a Pro
Make sure you know the lot number you wish to bid for. Lots are usually auctioned in order and the lot number will appear on a large screen in the front of the room.
The most important aspect of the bidding process is to keep a cool head. It is all too easy to allow competitive instincts to take over in an auction room, (why else are auctions so successful?), and end up paying far more than you can afford. Remember, once the hammer falls, the property belongs to the highest bidder, whether they can finance it or not.
If the property you wish to purchase does not meet its reserve price (i.e. the minimum sale price), then you can contact the seller after the auction and make a private offer.
Step Six – SOLD!
If you are on the receiving end of these magic words, then congratulations, you are well on your way to owning a commercial property. Once you have paid your deposit, the remaining balance will be due by the contractual completion date. Because all the surveys and title checks were done prior to the auction, the purchase normally completes within four weeks or less.
Buying a commercial property at an auction is a good way to secure a property quickly, and with little fuss. However, beware of so-called, ‘auction bargains’; if it seems too good to be true it probably is. If you are going to invest your money in a commercial property, you need to seek experienced, professional legal advice, to ensure you do not end up making a very expensive mistake.
Saracens Solicitors is a London based firm with years of experience in commercial property sales. To further discuss any of the issues raised in this blog, please phone our London office on 020 3588 3500 to make an appointment.
Do you have any thoughts on this article? We would value your contribution, please feel free to add your comments below.