Going, going, gone! Property programmes like “Homes Under the Hammer” glamourise buying property at auction then renovating and selling on or letting out. If it were only as simple as turning up, placing the winning bid and walking away with a property for a cut-down price. But what about the failures or the losses or the unexpected problems? We do not hear so much about them, do we? If buying a property at auction were simple and straightforward and free of risk, we would all be doing it!
The positives of buying property at auction
Let’s look at the positives of buying property at auction. Price is clearly an attraction. Properties that are put to auction generally have a lower price than equivalent properties on the open market. If you want some clarity on the bidding process, at auction, you know what others are bidding. In a traditional closing date, you need to contend with blind bidding and being unaware of what others are offering.
Another benefit is speed. Most properties sold at auction complete in 28 days after the hammer falls. If you are looking to move quickly, this type of purchase might be for you.
However, when something looks too good to be true, it usually is!
There are many challenges buyers face when buying property at auction.
Be prepared in advance of the auction
You should not simply turn up on auction day and expect everything to fall into your lap. There are many steps you need to take before the auction day to ensure you do not buy a pup.
Do your homework
Once you have identified a suitable property from the auction list, make sure you visit the property. You need to satisfy yourself about the condition of the property and what repairs and renovations may be needed. Importantly, make sure you have a survey carried out on the property. Properties which are put to auction do not need to provide a Home Report of Energy Performance Certificate. This means the caveat of “buyer beware” applies. You must take steps to protect yourself from buying a property that could quickly become a money pit because of structural problems and the high cost of repairs.
If there are any suggestions of structural, rot or dampness problems, make sure you thoroughly investigate these and get estimates for the cost of resolving these.
Importantly, check out the prices of equivalent properties in the locality. You can easily do this using the ScotLIS service provided by the Registers of Scotland. You can check the prices locally and, if the property you are interested in is registered in the Land Register, you will be able to view the price history and can purchase the Title for £3 (plus VAT). All you need is the postcode.
To find out about property coming to auction, get on the auctioneers’ property lists. These will provide you with a list of properties and the dates of forthcoming auctions. The earlier you gather this information, the sooner you can focus and do your homework on properties that interest you.
Check out the title and property searches
Have your solicitor check out the title to the property and conduct all relevant searches. At the auction, you take the property “warts and all”. That means if there is a title defect or a charge over the property, you will inherit the problems when you buy. You do not want to be faced with title problems you only find out about after your successful bid! Remember, too, that you will need to meet your solicitor’s fees for checking out the title whether you are successful at auction or not.
Getting your finance in order
If you are not a cash buyer, it is essential you have your mortgage finance arranged and your lender knows you are buying at auction. The purchase will usually complete within 28 days so it is important your mortgage is available to allow you to settle within that timescale.
Whilst the purchase must complete, usually, within 28 days, you will need to pay a non-refundable deposit (normally 10% of the bid price) on the day of the auction. This is a deposit towards the purchase price with the balance being payable, normally within 28 days. If you fail to complete the purchase, you will lose the deposit.
However, in addition to a deposit, you will also need to pay an administration fee. This is normally 1% of the successful bid (plus VAT) and will usually be subject to a minimum charge. Check this out in the auction particulars. This is a fee you pay to the auction house and it does not come off the price you pay for the property.
You need to fully cost any renovations or improvements you wish to carry out to the property. There is no point in buying property at auction that is in a state of disrepair only to discover that you have run out of money to carry out the repairs or improvements.
Prepare a budget in advance and this will allow you to decide on the ceiling for your bid on the auction day.
Finally, once your bid has been accepted, the risk in the property passes to you. That means you must insure the property to protect it from insured risks.
On the auction day
When the bidding opens, you will quickly find out what others are prepared to bid for the property. The open bidding allows you to decide when to enter the bidding and, importantly, when to withdraw. It is easy to get carried away so please make sure you have a fixed ceiling because exceeding it might lead to problems with any renovations.
When your bid is accepted, you need to sign the “Articles of Roup”. These form the contract of sale and purchase and will specify the completion date. Unlike the traditional method of house purchase where solicitors exchange formal letter (called “missives”), the Articles of Roup set out the entire contract and are signed immediately on conclusion of the bidding process.
You will also pay the deposit and the administration fee. Your solicitor then needs to carry out the conveyancing to transfer ownership of the property to you in readiness for completion, usually, around twenty-eight days after the auction date.
The financial consequences of failing to complete can be severe to it is essential you have you finance arranged to enable you to complete within the twenty-eight-day timescale.
Other features of buying property at auction
You should also be aware that whilst a property has been listed for auction, you can still make an offer to buy it before the auction date. If your offer is accepted, you will need to pay the deposit, enter into the contract to buy and the property will be withdrawn from the auction. For this reason, be prepared to spend money having a property checked out in the knowledge that if someone makes an acceptable offer before the auction date, you might not get a chance to bid for it because it will be withdrawn.
There are two other points worthy of note. Properties that are put to auction represent only a small percentage of all the properties available on the market. Also, the standard or condition of properties put to auction is unlikely to be good.
What are my next steps when considering buying property at auction?
We strongly recommend that you speak to us before embarking on your bidding journey. Our solicitors have a wealth of experience of dealing with properties purchased at auction. They will guide you through the process and explain the benefits and pitfalls. It is important to make sure the title is in order and there are no “surprises” that might prove expensive.
Contact us today if you are considering buying property at auction.