Looking for a new home? Not enough cash? It’s not all doom and gloom…
With the UK market still suffering from the after affects of the financial meltdown, buying a property at auction is becoming increasingly popular. And why not? The hefty prices charged by estate agents are ever increasing, whereas the auction route can be considerably cheaper – and if you know what you’re doing, you could bag your dream home at a bargain!
Although expense is a prime concern for most, it is the time efficient factor which often attracts home seekers to the auction room. The ‘traditional’ route may take up to 12 weeks to complete and one runs the risk of losing the property at the eleventh hour. The fear of being ‘gazumped’ and more recently ‘gazundered’ after having your heart set on a property can become an issue. Then there are the delays caused by agents, the other side solicitors, third parties in the chain, mortgage companies etc. Not only is this distressing for some, but also very time consuming. However, when buying a property at auction, upon the fall of the hammer, the property is contractually yours. In other words the ‘exchange of contracts’ takes place when the hammer hits the gavel, legally binding all parties, in a second.
But it’s not all good news – the potential pitfalls of buying a property at auction are plenty. Professional bidders consider it a cardinal sin to enter an auction without ascertaining, in advance what their maximum budget is. It is an even bigger sin to exceed that budget, amidst all the hype and excitement of the auction room.
Survey the Property in advance
Prior to the auction date, review the auction catalogue thoroughly. If any particular property attracts the eye, visiting and inspecting that property beforehand should be an obligation – preferably with an architect or a builder. Carry out a structural survey on the property and ascertain its actual value. The cost of a full structural survey can vary between £300 to £1000 but this is money well spent. The survey report will show any defects in the property which are not always visible to the naked eye; potentially saving you thousands of pounds.
Reviewing the legal pack
And it doesn’t end there. If the interest subsists, further enquiries should be made and a legal pack requested. This pack should include the title documents and information on the property generally. A legally trained eye will be able to spot, for example, if any covenants or other burdens exist which may diminish the value of the property. It goes without saying that a solicitor, skilled in the law of property and preferably auctions, should be instructed to review the pack and provide a detailed report.
Put yourself in the seller’s shoes. Why would he / she be selling the property at auction? They may be after a quick sale, but there may be other more sinister reasons. Maybe they believe the property cannot be sold on the open market due to its defects, and that someone will buy it ‘blindly’ at auction. This is where buying a property at auction can be dangerous if you are not fully prepared in advance and do not have professional help. A large quantity of properties listed at auction (in the current market), are those which have been repossessed, eg sold by mortgage companies to raise quick money to pay off outstanding debt on behalf of the borrower. This naturally has implications. The previous owner may have had a poor credit rating and this could mistakably show up on a new purchaser’s record. Again, this is an issue that can be dealt if you know what you are doing and advised by a solicitor.
Get your finances organised early
Another potential pitfall is getting into a pickle with your finances. If a bid is successful, you are expected to pay a 10% deposit immediately with the remainder on completion. Unlike the traditional route, when buying a property at auction, completion (usually) occurs within 28 days or less. Proper planning and negotiation can allow for this date to be extended. Failure to pay the required amount on the completion date however may have serious consequences – you may lose your deposit and be liable to pay damages to compensate the seller.
If a mortgage is needed to fund the purchase, this should be agreed in principal with a mortgage company or through a mortgage broker. Remember that a lender may take as long as 4 weeks (sometimes longer) to provide you with the requisite money, taking you over the agreed completion date. Before any mortgage company / bank lends money it will want to conduct a valuation of the property which itself takes time. Further, if the amount being lent is lower than the mortgagee’s valuation, the difference must be paid out your own pocket. A shortfall at the last minute will therefore jeopardise your purchase. Do not fall into this hole. Obtaining the assistance and advice of professionals before buying a property at auction, is a must.
Bidding on the day
The auction day itself can be an exciting experience but for those new to the environment, equally daunting. Bidders with no experience are advised to proceed with caution and attend a few trial auctions before actually taking part. Beware of the nasty tricks and sleight of hands. The auctioneer may ‘bid off the wall’; ie inventing bids to inflate the purchase price. There may be individuals in the room making ‘dummy’ bids to achieve the same goal. Do not fall for this trap, stay sharp and above all, stick to your budget!
All in all, the auction room remains a great place to bag a bargain. It can save you ample time and reduce a lot of stress. But one must be careful. Do your research and be prepared.
To discuss buying property at auction (or indeed selling a property in the same way), or to discuss your options going forward, seek legal advise from our residential conveyancing team. We are recommended by a number of bank managers due to the professionalism and many years of experience within the team. Our business is built on providing clear and concise legal advice. We will do whatever we can to ensure that your transaction runs as quick and smoothly as possible, with the minimum amount of stress.
Head of Residential Conveyancing