Purchasing a property at auction is becoming increasingly popular, but it is important to be aware of the risks involved.
At AFG Law, our specialist auction conveyancing solicitors can help guide you through the auction process, ensuring that you are making the right decisions along the way.
Why do people choose to sell properties at auctions?
Traditionally, properties were placed in auction because there was a problem with them which meant that they did not sell on the open market for sale.
More recently, some properties are being placed in auction to obtain a quick sale. The benefit of auctions for the seller is that there is little if not no contact between the buyer and the seller before the auction.
Once the auction has taken place, exchange of contracts has taken place, so its too late for a buyer to ask questions about the property given they are legally committed to buy it.
In addition, an auction property usually has a fixed date for completion which the buyer is legally bound to comply with. This means less chance of delays for the seller.
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Is it a good idea to buy property at auction?
Yes, it can be a really good idea to buy a property at auction, however, it is important that you are aware of the risks you may be making compared to buying a property from an estate agent.
When you buy a property at auction, you have the chance of paying a price lower than market value which means there’s a chance that a profit can be made.
The sale is also likely to be completed much quicker than a market sale so often that can be a quick profit. Once an auction has taken place, completion will usually take place within 15 to 20 working days.
The main risk for the buyer is that there is a “title defect” or something affecting the property, which makes it difficult to mortgage or sell on.
Also, auction legal packs often lack specific documentation. It is common for a seller to simply fail to include a document if it reveals a problem. Unless a buyer knows what to look for they will not realise what the problem is or why a document is missing. It is for this reason that a conveyancing solicitor should be instructed to review the auction pack.
How to prepare for a property auction
Before you consider going to a property auction, you should consider carrying out the steps below.
Research properties and auctioneers in the area
You should start by concentrating on the areas you’re interested in and contact your local property auction houses.
They will be able to advise you on any upcoming auctions and will likely add you onto a mailing list so you receive the latest auction catalogues. You should also familiarise yourself as to property values within that area.
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Be aware that you may not be able to view
Auctioneers rarely permit viewings. Some auctioneers now have online property tours, but only a few do this. Most auction properties have to be bought without an inspection or survey.
Obtain a copy of the legal pack
The auction legal pack will contain documents for the property. All auction legal packs are different and are prepared by the seller’s solicitor.
Most, if not all, auctioneers publish the auction packs on their website. Most auctioneers allow potential buyers to sign up for property updates.
This is a useful tool for buyers as it tends to generate an email when the auction pack is uploaded and when further documents are added.
Set your budget
Ideally, you should give yourself a maximum price that you are willing to pay for the property.
When considering this figure, you should ensure they also take into account any additional costs that are payable and as are referred to in the Special Conditions as well as stamp duty land tax. I
n addition, if you are using bank funding to fund the transaction, you should also consider the maximum amount will lend to you.
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Do you have to be a cash buyer to buy a property at auction?
No, you do not have to be a cash buyer to buy a property at auction. It is possible to obtain mortgage to assist with the purchase of the property.
The difficulty with auction properties is that once the auction has taken place the completion date will be fixed. Often there is no enough time to do all the things necessary after an auction to obtain a high street mortgage.
The process is just too long. Buyers often sway towards bridging funding as it is often publicised as quick short-term lending. From a legal perspective, that is rarely the case.
Often bridging lenders are very strict in their requirements such that it can take longer to satisfy.
As buyer, if you intend to use mortgage or bridging finance or the property purchase, you should, at the very least, have a decision in principle before attending the auction.
If you are successful and have exchanged contracts at auction, it is important that you approach your lender immediately after the auction to start the lending process.
It is also sensible to tell them the required completion date and ask whether they can adhere to the timescale.
Do I need a solicitor before buying at auction?
Yes, there are two reasons why you will need a solicitor. The first is that exchange of contracts will take place at the auction. If you are the winning bidder you will have exchanged contracts and so will be legally bound to buy the property.
When buying a property on the open market for sale, buyer instructs solicitor to carry out investigations before they exchange contracts. This means their solicitor can ask questions of the seller’s solicitor and form view as to whether there is anything that could affect its subsequent use, saleability or mortgageability.
There is no opportunity for a buyers conveyancer to ask questions before an auction. The auction legal pack is intended to include all documents a buyer’s conveyancer would want to see but often it doe not.
As the buyer you should instruct a solicitor to review the auction pack a this is buyers only real chance investigate the property and identify if there are any problems with it.
If you are successful at auction you will be asked on the day to provide details of your nominate solicitor.
It is important that you instruct solicitor who is familiar with the auction process but also who is able to deal with completion of the transduction within the short timescales.
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How much does it cost to buy a property at auction?
If you have made the winning bid, you need to pay the deposit on the day of the auction so you need to ensure you have the fund available to do this.
The deposit is often 10% of the purchase price but sometimes it is a different figure. The Special Conditions will confirm the amount of the deposit payable.
You will also usually need to pay an administration charge and buyers premium. These will be referred to in the auctioneers terms and conditions or the Special Conditions.
The balance of the purchase will be paid through your solicitor as part of the completion process. If there are any other charges as listed in the Special Conditions of the sale in the legal pack, these will become payable on completion.
You will also need to pay your legal costs. Our costs for assisting with the purchase of an auction property start at £395.00 plus VAT and disbursements. Please contact us for a quote specific to the property 01204 377 600
What to do once you’ve won a property at auction
If your bid is successful, you will likely be approached by a member of the auctions team who will take you over to the contracts desk. There you will be asked to provide your ID and proof of residency.
You should ensure you check your auctioneers requirements and take with you the necessary documents if you are attending the auction in person.
If attending an online auction, you will need to ensure you have provided the necessary documents when registering to bid.
You will then be required to sign the contract and pay the deposit there and then.
At the fall of the gavel, you are bound by the auction contract. Most auction contracts place “the risk” of the property on the buyer.
This means that if it is damaged or destroyed after the date of the auction but before completion, the buyer is still legally required to complete the transaction. It is for this reason that a buyer should identify before the auction who is responsible for insurance.
If it is the buyer then it is advisable for a buyer to arrange building insurance immediately after the auction.
Once completed, your copy of the memorandum of sale and related papers will be emailed to your solicitor by the auction house.
After the auction, the auction team will confirm your exchange of contracts in writing to notify your solicitor and explain the next steps.
You should also contact your auction conveyancer as soon as possible after the auction so they can start the process of preparing for completion.
Given there is a short space of time between the auction and completion it is important the auction conveyancer as quickly as possible so they can start work.
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Pros and cons of buying a property at auction
You may buy for lower than market value price
Properties are generally placed in auction because they cannot sell or are best not be sold on the open market, and so they are usually priced at less than open market value.
It’s fast paced
The auction itself is fast paced and so can be a very overwhelming place. In addition, the bidding for a property has to be done quickly.
This means buyers often have little time to properly consider their next bid and sometimes bid higher than they really intend to.
Sellers can’t pull out
At auctions, when you place a winning bid and the hammer falls, contracts are exchanged meaning the seller is legally bound by an auction contract.
This creates a legally binding contract between yourself and the seller. The seller is required to sell the property to the buyer for the price agreed.
Even though buyers are legally bound by an auction contract some buyers do “pull out” or fail to complete. This is common where buyers have bid on a property without considering the auction legal pack or fail to ensure they have sufficient funding.
If, at solicitor stage, they realise there is a problem with a problem and that problem is one they are not willing to take on or they cannot secure funding some buyers do not complete on the transaction.
This can be a decision they choose to take after legal advice or one they are forced to make if they simply cannot get sufficient money together.
Failing to complete or “pulling out” of an auction contract should be avoided. There are financial consequences for doing so. Buyers lose their deposit paid (and any administration costs) and have to pay “compensation” to the seller.
The amount of compensation varies per transaction, but at the very least usually includes the auctioneers costs and the sellers legal costs.
Buying is riskier
When buying a property on the open market for sale, a buyer instructs their conveyancer to carry out investigations before they exchange contracts.
This means their conveyancer can ask questions of the seller’s solicitor and form a view as to whether there is anything that could affect its subsequent use, saleability or mortgageability.
There is no opportunity for a buyers conveyancer to ask questions before an auction.
Auction fees are expensive
With auctions, the buyer is expected to pay some or all of the auction fees. This is often called the “buyers premium”. Buyers can also be asked to pay the Seller’s legal costs and refund the cost of searches.
Sometimes there are hidden costs or obligations such as “overage payments”[link to our overage page] that will need to be paid after completion and may bind the property for years to come.
VAT also may be payable on top of the purchase price. This applies to some commercial or business properties but not all properties.
What are the main risks of buying property at auction?
One of the main risks of buying at auction is that you are bound by a contract on the fall of the hammer. This means you need to know whether the property is a good investment before you attend the auction.
You need to know if there is anything affecting the property which could affect its future use, value, saleability or mortgageability. You need to form a view on this before you attend the auction and not after.
If, following the auction, you identify any of these issues you may not be able to withdraw from the transaction without financial consequences
Another main risk of buying at auction is that if there are structural defects, you may have an unsafe property to live in which will stop you from getting finance on the property.
The best way to reduce risks is to get a Conveyancing Solicitor involved, who can help to support you throughout the entire buying journey. Get in touch with us today to start your auction process.