What Property Investors Need to Know
Property auctions have long been popular with investors and landlords. They can offer opportunities to buy properties that might not come to market through the usual estate agency route, including properties in need of renovation, repossessions and investment opportunities.
But if you have started looking at auction properties, you may have noticed that not all auctions work in the same way.
You may come across terms such as traditional auction, modern method of auction, conditional auction or unconditional auction.
For a first-time buyer, the differences can be confusing. For a landlord or property investor, understanding those differences is particularly important because the auction method can affect when you become legally committed to the purchase, how quickly you need to complete and what happens if you cannot proceed.
So, what is the difference?
Traditional Auction – When the Hammer Falls
Traditional property auctions are probably the type most people picture when they think about buying property at auction.
The property is offered for sale at a specified date and time, usually with a legal pack available for potential buyers to review beforehand.
If you are the successful bidder, the property is typically sold when the auction ends or the hammer falls, subject to the auction’s terms.
At that point, you will generally be legally committed to buying the property.
You will normally be expected to pay a deposit and complete the purchase within the timeframe set out in the auction conditions. This can be considerably shorter than the timescale you might expect when buying a property through a conventional estate agent.
For an investor, this is one of the most important things to understand.
You should not bid at traditional property auctions unless you are in a position to proceed if you are successful.
This means having your finances arranged, understanding how you will fund the purchase and, ideally, having the legal pack reviewed before you bid.
If you are relying on a mortgage, you should also consider whether the lender can provide the necessary funds within the required completion period.
That is not always straightforward, particularly if the property needs significant work or there are issues with the title.
What Is the Modern Method of Property Auctions?
The modern method of property auctions are different.
It is sometimes referred to as a conditional auction. Rather than bidding in a traditional room-based auction, properties are often marketed online and buyers have a set period in which to place bids.
The successful bidder will usually pay a reservation fee and enter into a reservation agreement. The buyer and seller then have a period in which to proceed towards exchange of contracts and completion.
The important point is that the buyer is generally not immediately committed to the purchase in exactly the same way as they would be following a traditional unconditional auction.
However, this does not mean that the modern method of auction is risk-free or that you can simply change your mind without financial consequences.
The reservation fee may be non-refundable if the transaction does not proceed, depending on the terms that apply. The precise legal position will depend on the auction provider’s terms and the documents you sign.
This is why the legal paperwork needs to be understood before you bid.
So, Which Is Better for a Property Investor?
There is no simple answer. The right auction method will depend on your circumstances and the property you are buying.
A traditional auction can provide greater certainty for the seller because the buyer is committed to the transaction once the contract is formed. For a buyer, however, the timescale can be challenging.
The modern method can provide a longer period in which to arrange the purchase, which may appeal to some buyers. However, the buyer will need to understand the reservation arrangements and the financial consequences of failing to proceed.
Neither method should be viewed as an opportunity to “bid first and sort out the legalities later”.
The legal and financial work should happen before you commit.
The Legal Pack Is Your Starting Point
Whatever type of auction you are considering, the legal pack deserves careful attention.
The documents may include the title, contract, searches and other information relating to the property. There may also be special conditions of sale that contain important information about the transaction.
These can sometimes include additional costs or unusual contractual terms.
For example, the buyer may be responsible for certain costs that would not normally be expected in a conventional purchase.
An investor looking only at the guide price could therefore underestimate the true cost of buying the property.
It is also important to understand whether there are restrictions affecting the property.
If you are buying as a landlord, you should check whether the property can be used as you intend. For a leasehold property, for example, the lease may contain restrictions on subletting or require consent before the property can be let.
If you are buying a property with the intention of refurbishing or developing it, you should also investigate whether there are any legal or planning issues that could affect your plans.
Don’t Forget About the Condition of the Property
The legal pack is important, but it is not a substitute for seeing the property.
Auction properties are sometimes sold in need of substantial work, and the photographs and marketing description may not tell the whole story.
If you are buying an investment property, you need to consider not just the purchase price but the likely cost of bringing the property up to the required standard.
You should also think about whether the property will be suitable for letting once the work is complete.
If the property is already occupied, the position of the occupiers should also be investigated before you commit to the purchase.
What Happens If You Are Buying with a Mortgage?
This is an area where investors need to be particularly careful.
A traditional auction may require completion within a relatively short period. That can create difficulties if you are relying on a mortgage and the lender needs additional information or valuation work before releasing funds.
There can be even greater complications if the property has issues that affect its mortgageability.
For example, a property may have:
- A short lease.
- Structural problems.
- An unusual title.
If you are planning to bid, you should speak to your mortgage adviser and solicitor beforehand.
Some investors may use bridging finance to complete an auction purchase and then refinance onto a longer-term mortgage once the property has been acquired or refurbished.
That can be a viable strategy in the right circumstances, but it comes with its own risks and costs and should be considered carefully.
What About the Deposit and Other Costs?
The purchase price is not necessarily the only amount you will need to budget for.
Depending on the auction and the contract, you may need to pay:
- A deposit.
- A reservation fee.
- Buyer’s fees.
- Legal costs.
- Search costs.
- Other costs set out in the special conditions.
The exact arrangements vary, so it is important to understand the terms of the particular auction you are entering.
For an investor, this is particularly important when calculating the potential return on the property.
A property that looks attractive based on the headline purchase price may look very different once all the acquisition costs and refurbishment costs have been taken into account.
The Biggest Mistake Investors Make
The biggest mistake is treating an auction like a conventional property purchase.
With a conventional purchase, you can generally make an offer and then have your solicitor investigate the property before you exchange contracts.
With property auctions, you may be committing yourself much earlier in the process.
That means the legal work needs to be done before you bid, not afterwards.
This is particularly important if you are new to property investment.
It can be tempting to focus on finding a bargain, but the cheapest property is not necessarily the best investment.
The legal pack might reveal a restriction that prevents your intended use. The lease might make the property difficult to let. The completion deadline might not work with your funding. Or the special conditions might add costs that you had not anticipated.
Finding these things out before bidding gives you the opportunity to make an informed decision.
So, Should You Buy an Investment Property at Auction?
For experienced investors, property auctions can provide interesting opportunities. But they require preparation.
Before bidding, you should understand:
- Which type of auction you are entering.
- When you become legally committed.
- The terms of the contract.
- The special conditions of sale.
- The required completion timescale.
- How you will fund the purchase.
- Whether the property can be used for your intended purpose.
- The likely costs of any work required.
If you are unsure about any of these points, it is worth getting advice before you bid.
Once you have committed to the purchase, it may be too late to discover that the property does not work for your investment plans.
How Insight Law Can Help
Buying at auction can be very different from buying a property through the traditional route.
At Insight Law, our Buy-to-Let team advises landlords and property investors on the legal aspects of purchasing investment property, including auction purchases.
If you are considering bidding on a property, we can review the available legal documentation and help you understand the contractual position before you commit.
Our advice is not simply about checking whether you can buy the property. It is about helping you understand what you are actually buying and whether there are any legal issues that could affect your plans as an investor.
If you have found an auction property that you are considering bidding on, it is sensible to get the legal pack reviewed before you place your bid.
This article is intended as a general guide and does not constitute legal advice. Auction processes and contractual arrangements vary, so you should obtain advice on the specific property and auction terms before bidding.