Buying a property at auction can be very much like stepping into the unknown if you are new to the business. Buying a home or investment through an auction is not as simple as bidding for something on eBay. In fact, failing to do your homework or bidding too high can have grave financial consequences.
As a result, it is extremely important that you are all clued up on exactly what happens when buying a property at an auction. Knowing about how to arrange the necessary auction finance, account for any fees that will be incurred and understand the workings of process and how to prepare for it are crucial. Furthermore, whilst all short term property finance arrangements such as development or bridging finance have a time element to them, none are as pressing as that of auction loans where a purchaser has a very short window in which to complete the purchase of their new property.
Hence, knowing the intricacies and details of the auction process as well as your rights throughout an auction can be the difference between securing a bargain and potentially losing out in both the short and longer term.
What Happens at a Property Auction?
It may sound self-explanatory, but when you are investing a considerable amount of money; often hundreds of thousands of Pounds or even more into a property, it is essential that you know every little detail of how an auction actually works.
Usually, more than one property or item will be put to auction in a hall or conference room. It is often the case in the UK that a company will hold the auction on the property owner’s behalf, with the auctioneer and seller taking a portion of the commission should the house, block or plot of land be sold on the day. However, the process is not precisely the same across the world: for example, in Australia, it is common for the auction to take place at the property location.
The auction date is usually well advertised in advance giving potential buyers the opportunity to do their research, get professionals to scope out the building and get their finances in order well before the actual auction process takes place. Several people will attend on the place of auction on the day; sometimes the actual bidders or people acting on their behalf.
The auctioneer will present each estate one-by-one and refer to the catalogue where prospective purchasers will find details and specifications of each building. The auctioneers will engage with the audience and tempt people into bidding. Participants will raise their hand or a marker when they want to bid and ultimately, the highest bid wins.
Once the highest bid has gone ‘once, twice, sold,’ the gavel falls and the winning bidder is required to sign the paperwork and make a 10% deposit there and then. The buyer then has 28 days to come up with the remaining 90% of the property or land value. An important point to note though is that any finance acquired will not cover the full outstanding 90% and the buyer must account for this.
Why do People Sell Properties at Auction?
If you want to sell a property quickly, an auction is seen as one of the quickest ways to do it. However, others may choose to sell their property at auction if:
- The property has been on the property market for a considerable amount of time without any offers
- The property has been repossessed as it is probate due to the owners having passed away
- The property is being repossessed due to payment defaults
Consequently, relatives or a debtor may be putting the house to auction as they intend to consolidate debts or just want to earn the income from the estate.
What Are The Advantages of an Auction?
Evidently, there are benefits to going to auction for property owners looking to make a quick sale. However, for those looking to buy at auction there are significant advantages too, such as:
- The likelihood of being able to complete on a property much quicker than via traditional routes
- Avoiding the often long-winded process of buying a home
- Avoid being ‘gazumped’ by another buyer; losing the deal at the last minute
- Potentially buying a property that is up to 30% cheaper
How To prepare for an Auction
Here are some of the main points to remember when it comes to preparing for an auction:
Ask for a Catalogue – If you are seriously considering buying a property at auction, it is vital that you pick up a booklet that indicates all the information about the properties available at the auction. This is something that can be requested beforehand when you go and research the property.
Keep Your Wits About You – The catalogue will help you to avoid any nasty surprises later or end up disappointed. You will also be able to see if the house or flat you’re interested in has a ‘reserve price’. This is important, as it means that they may have a minimum price they want to sell the house at, and will not take anything less. Nevertheless, exert a healthy amount of caution when it comes to reserve prices, even if they seem very low as it is not uncommon for sellers to set a very low reserve price to drive up interest in the property.
Arranging a Viewing – One of the best things you can do when it comes to buying a property at auction to avoid disappointment is to visit the property beforehand. Usually, there are around four weeks between publications of the catalogue and the auction itself.
It may also be worth having a solicitor, surveyor or builder come with you to check any legal clauses involved in the auction catalogue and any renovations that you could do. This can help avoid buying the property at auction without a proper viewing. Not viewing a property can leave you susceptible to finding that a property has outstanding issues such as asbestos, no possibility for planning permission or subsidence.
Organising Your Finances
Don’t get carried away at auction as it is very easy with the auctioneer and the adrenaline running. It is important to thoroughly research beforehand and consider the potential value of the property you are interested in. You should also consider whether you can in fact afford to repay any property finance required. There are different approaches you may decide to take, including:
- Look at current property trends, especially in that area: what are other houses selling for, or what are tenants paying for rent on average? Check websites such as Zoopla which can help you get a rough idea
- Consider what exactly you want to do with the property. Do you want to make changes to it and sell it on, or rent it out?
- You will need to have the deposit ready on the day of the auction, which can be financed through savings, auction finance or a mortgage
- You will also need some sort of proof of identity to confirm the purchase
- Consider additional fees when deciding how much you can afford to buy. Fees may include solicitor and seller’s fees, buildings insurance, stamp duty and auction charges. There may also be a contract documentation fee to pay, which is usually around £625 plus VAT.
- When at auction, try to ask for an addendum sheet. This sheet provides additional and updated information on the properties available at auction. This could be vital as it may reveal changes to the condition of the property, as well as alterations or any additional clauses involved with the property contract
- Arrive early, especially if auctions are new to you to get a feel for the environment. You can also choose to sit tactically by getting a seat at the very front, in order to maximise your chances of winning the property that you want when you bid