Whether you are a property developer, a buy to let landlord or potential homeowner, there are several advantages of buying property through an auction including:
- Getting a bargain of up to 30% (This is Money)
- Avoid being gazumped by another party
- Avoid the traditional lengthy process of buying a house
- Being able to move in quickly
But without understanding the basics of the auction process and what is expected, you can find yourself losing out on a great investment or spending way over budget. With this in mind, we are pleased to provide the ultimate starter’s guide to purchasing property at an auction.
Why do properties go on auction?
Properties such as bungalows, flats and homes can go on auction when the seller is trying to stimulate a quick sale. Perhaps the property has been on the market for a long period of time without any firm offers or maybe the property has been repossessed due to payment defaults or is probate due to the deceased owners. In case you may find the bank, debtor or relatives are looking for a quick sale in order to raise finance and consolidate debts.
About the auction
In the UK, a company typically runs the auction and there will be several properties or items being sold on the day in one location, which could be a conference room or hall. Unlike in Australia, the auction will not take place at the property’s location. The properties will be put on auction by the owners themselves or by an estate agent or seller on their behalf. The auctioneers and sellers will take a commission provided that the property sells.
How to prepare before the auction
Ask for a catalogue
This is a booklet provided by the auction house and will have information about all the properties available. The auctioneers have the responsibility to provide accurate information about the estates beforehand. Some properties will have a ‘reserved price’ which is the minimum they wish to sell the place for and therefore will not be willing to sell for anything less.
In an example case carried out by MoneySavingExpert, they explain that this reserve price can be very low initially to generate interest but can increase rapidly during bidding. In their auction, a property with a reserve price of £325,000 was eventually sold for £514,000.
Arrange a viewing
If you are particularly interested in a specific property, it is recommended to view the property in person before you to go the auction. There is usually four weeks between the publications of the auction catalogue so you have to be quick if you want to go see it. People suggest going with an extra person so that you can get a second opinion.
It is also worth taking a builder, solicitor and surveyor so that you can get an idea of what you could do with the place, check the valuation and any legal clauses mentioned in the catalogue. This will allow you to be as informed as possible when preparing for the auction – and some say it is worth making several visits.
A basic survey can start at around £250 so you should budget for this. The cost of a solicitor will depend based on their rates but will be important to ensure there are no covenants or legalities that could affect the value of the property.
Arrange your finances
This is the crucial part where you need to do the maths and consider how much you can afford and also the potential value of the property you have your eye on – whether you wish to rent it out to tenants or fix it up and sell it on. You need to look at your own savings because you will be required to make a 10% deposit on the day if you win the bidding and the gavels falls. You will then have the remaining 28 days to provide the 90% either through your own savings, a mortgage or bridging finance.
To get a good idea of the estate’s potential value, consider the current property trends or how much tenants are paying in that area and the demand. You can use online tools like Zoopla to estimate what the property value might be like in a few years if you sell.
You should also consider additional fees such as solicitor fees, seller’s fees, stamp duty and buildings insurance. Once you have the numbers figured out, you can set the amount you are willing to bid and this can be your maximum limit which you will not go above.
Get your deposit ready
You must be ready with that 10% deposit on the day which can be paid by a banker’s draft, a building society cheque or personal cheque. You will need your ID to prove who you are and to confirm the purchase.There may also be a contract documentation fee to pay which is around £625+VAT. You will not be able to secure the property without this payment.
Do a dummy run
Auctions can be stressful and complicated and without any experience, you may find yourself overspending and out of your depth. With regular auctions happening, it is good experience to go watch an auction and get a feel for how it works before you go ahead an invest on something big.
On the day of the auction
Get there early
Auctions can be crowded places so it is important to be early and get a good seat. You want to make sure that you can hear everything going on and that you can be seen and heard by the auctioneer when making your bid. You can be tactical with your positioning so that you can see everyone else as well.
Ask for the addendum sheet
An addendum sheet will be passed out which includes additional and updated information about the property on auction. This could be crucial such as changes to the condition of the building or clauses in the contract. The auctioneer will also double check that everyone has a copy of this and will read out any alterations last minute.
Don’t be intimidated by other bidders
Bidding can be a real rush of adrenaline but it is important not to be scared of other bidders or go beyond your limit, otherwise you may not be able to afford your 10% deposit and your property may have a much lower return on investment.
What if I cannot attend the auction but still want to be involved?
If you want someone to make the bids on your behalf, you can give them written consent to do so – this could be a friend, family member or colleague or even a member of the auction house, provided that they have two days notice.
Bids can also be made through the phone during the actual auction if you have a representative in the room. Your bidding can also be carried out online if the auction house has the technology.
Your 10% deposit is a legal obligation
As soon as the hammer falls, you are legally committed to buy that property and provide your 10% deposit on the day. You will be required to sign the relevant paperwork and once successful, the auctioneers will provide copies of this and other documentation from the seller’s solicitors to you and your solicitor.
Completing on the property
You will be required to raise the remaining 90% within 28 days of your bid and once completed by your solicitor, the property will be yours and you may be able to move in or start work immediately.