A guide to purchasing properties at auction

Buying a property at auction is exciting and a great way to find a bargain. The difference between buying at auction and buying through an estate agent is that exchange and completion is faster and runs to a fixed timescale. The sale is agreed when the auctioneer’s hammer falls and so there is little risk of the transaction falling through.

Whether you are a buy-to-let landlord building a property portfolio or a homebuyer who wants to add value to a house and move quickly, buying at auction may be for you.

Before you start looking at auction properties there are key things you need to know. Here we guide you through some of the essential points.

Types of auctions – pros and cons

There are two types of property auctions: ‘traditional’ and ‘modern’ and there are some differences between them.

A traditional auction is normally preferred by cash buyers and experienced investors like buy-to-let landlords with property portfolios.

When the auctioneer’s hammer falls in a traditional auction, the successful bidder is then legally bound to purchase the property. They must pay a 10% deposit on the purchase price on the day and may have as little as 14 days left to pay the balance. Contracts are exchanged on the day of the auction.

If a buyer pulls out of the sale at this point, they lose their deposit. They may have to cover all the costs incurred in re-selling the property as well as any difference between the final sold price and the amount they initially agreed to pay. They might also have to pay interest on the property for every day it remains unsold.

With the modern auction method there is more flexibility for the buyer. The buyer is not legally obliged to buy the property when their bid is successful because they have simply bid for ‘an exclusive option to buy’. On the day of the auction, the successful bidder pays a non-refundable reservation fee which is usually 5% of the purchase price.

Once the bidder has paid the reservation fee they cannot be gazumped by another buyer. If the bidder themselves pulls out of the purchase they will lose the reservation fee – which is a lot less money than they would have lost if they had purchased through the traditional auction route.

It is important to know that the reservation fee is in addition to the cost of the property. As this amount is added to the sale price it could affect stamp duty (if it means the property falls into the next stamp duty bracket). Sometimes bidders pay a reservation ‘deposit’ instead of a ‘fee’. In this case, the money is deducted from the sale price and does not influence stamp duty.

In a modern auction the bidder does not exchange contracts on the day of the auction unlike with a traditional auction. Instead, they have 28 days to exchange contracts and another 28 days to complete the purchase. This longer time frame tends to suit homebuyers who need a mortgage as it gives more time to finalise mortgage paperwork.

How the pandemic has changed the face of auctions

During lockdowns face-to-face auctions were replaced with online streaming and rather than viewing properties in person, buyers were making more use of estate agents’ virtual tours.

According to Jeremy Prior, the managing director of Auction House, the way auctions are conducted has changed forever. He does not believe many auction houses will continue to hold only in-person auctions as they did prior to lockdowns because livestream sales have been so effective. He thinks it is more likely that auctions will become “hybrid affairs” – a mixture of in-person proceedings and live streaming.[1]

Tips to follow before auction day

Follow our tips to ensure you get the best property deal on auction day.

1.  Find auction properties

Find properties for auction by using online property portals such as Zoopla. Once you have found properties of interest contact the auction houses directly to ask for their catalogues.

Make sure the auctioneers you choose are regulated and hold the NAVA Propertymark. A regulated auctioneer will hold any money you pay in a dedicated and protected client account.

2. View properties of interest

Since lockdowns, virtual property viewings have become more popular. It is still a good idea to visit a property you want to bid on in person. Consider taking an expert such as an architect, builder or surveyor with you so you know how much it could cost to improve a property. You could also ask local estate agents to value the property to guide your bid.

If you need a mortgage, it is worth noting that most lenders will only lend money on homes that have a functioning bathroom and kitchen.

3. Ask a property solicitor to check the legal pack

The auctioneer will give you a legal pack for the property. This will include title deeds, environmental searches, information about fixtures and fittings and more. A property solicitor can examine the small print for you searching for loopholes or hidden covenants. It is important to understand the legal information otherwise the property may finish up costing you much more than you had planned.

Your property solicitor can also check the auction house’s terms and conditions. When you enter into a bid you are agreeing to these terms and conditions. It is essential that you understand what you are signing so you do not get any surprises.

Instructing a conveyancer before you bid for a property also means you can complete initial paperwork such as identity checks which will speed up the conveyancing process if your bid is successful.

4. Organize a survey

This is not a legal requirement, but a survey will tell you what state of repair the property is in, so you enter an auction with your eyes open.

When you buy a property that is in a good state of repair a Homebuyer’s Report may be enough. More detailed surveys are required for older properties and those that are in a poor state of repair. Research the different survey types and find the one that suits your property.

5. Plan your finances

Be realistic about how much a property is likely to cost. The guide price set on properties at auction is often set low to entice bidders. Most properties sell for at least 10% more than the guide price, especially if buyers showed a lot of interest before the auction.

Factor in the cost of the property deposit and/or reservation fee which you will have to pay on the day of the auction. You will also need to factor in stamp duty, mortgage costs and costs for professional services (conveyancing, surveying etc.), plus any renovations required.

If you need a mortgage, make sure you have received an Agreement in Principle (AIP) from your mortgage lender before the auction.

6. Arrange insurance

Once you have exchanged contracts on a property it is your responsibility. Make sure you have buildings insurance in place in case the worst should happen.

Tips for auction day

Stay calm and clear-headed on the day even though you may be feeling excited or nervous. If you do not want to bid in person a property solicitor can do so for you.

Here are our other top tips:

  • Remember to take proof you can pay the property deposit and two forms of identification (a passport and a utility bill are usual). Check with the auction house beforehand to make sure you bring all the right paperwork.
  • Turn up at the auction house early. If there are any changes to the property or there is any additional information, the auctioneer will share this before the auction starts.
  • Make sure you bid clearly – some auction houses give you a paddle to hold up.
  • Stick to your budget. If you lose out on a property today another one will come along.
  • If the property you want is unsold you might be able to buy it privately. Stay after the auction has finished to speak to the auctioneer.

Why choose Insight Law auction conveyancers?

Are you a buy-to-let landlord extending your property portfolio or a buyer looking for your own property at auction? Whatever your situation and auction experience, our knowledgeable conveyancers can help.

We know that buying a house at auction means you need to move quickly, but at the same time avoid costly mistakes. Our friendly property solicitors will manage all the legal practicalities for you and provide you with all the guidance you need to make a sound investment.

Talk to our conveyancing team today on 02920 093600 for more information about buying a property at auction.

 

[1] Property Reporter, Pandemic will have long lasting effects on auction rooms, https://www.propertyreporter.co.uk/auctions/pandemic-will-have-long-lasting-effects-on-auction-rooms.html

 

Posted by: Ryan Price on: 25 October 2021

Categories: Residential,