While the idea of “grabbing a bargain property” at auction is music to the ears of any property investor, you need to know your way around the auction room. The idea that you will simply roll up on the day, make an offer and walk away with a bargain is fools play. You need to do your research on the property as well as the process of buying a property at auction. Most of all keep your adrenaline under control and don’t overpay!
Visit the property
You can have a virtual tour, check all the documentation and research a property online but nothing quite beats a home visit. Everybody says “I would always visit the property” but sometimes we let our guard down, assume everything is straightforward and it can be easy to start bidding on property you know little about. The idea that everything sold at a property auction is “pristine” is a fallacy. Everything is listed, both the plus points and the negative points, it is up to you to find them in the legal pack.
When you visit the property you will also get a feel for the neighbourhood which can influence whether or not you bid for the property and if you do, at what level.
Make sure you know what you’re buying
Surely a house is a house? It has a certain number of bedrooms, bathroom, kitchen, sitting room, etc? Well this is not always the case!
When researching a property there are various issues you should focus upon such as the number of bedrooms and whether indeed one large bedroom has been split into two. You may also see the addition of a new bedroom in the loft and subtle changes in the layout of the property to what you would have expected. Surely that adds value?
Well, if a large bedroom has been split into two, the loft has been converted or other adjustments have been made without the freeholder’s permission, you could be in trouble. You may need to convert the property back to its previous layout which could incur serious costs. If this is the case then you need to factor these potential costs into your bid.
Keep your mortgage broker onside
There is a common misconception that all property purchases at auction need to be in cash. This is not the case. Upon a successful bid you will need to put down a 10% deposit and additional auction charges. You would normally have 28 days after the auction to complete the purchase with any delays seeing you lose your deposit. Therefore, it is very important to have your mortgage broker onside from day one.
See if they will visit the property with you; discuss the potential value and maximum lending facility they can provide. Also, very importantly, you should agree a maximum bid and do not go over that. If the mortgage broker is onside from day one then there’s a good chance the process will go smoothly and the purchase will be completed on time.
Read the legal pack then read it again
The legal pack is a regulatory obligation when it comes to selling property at auction. In reality, if there are any issues with the property such as outstanding bills, major works planned or any other additional costs, they will be detailed in the legal pack. There is no point going back to the auction house at a later date and complaining that you did understand the legal jargon. If you’re not sure then it is advisable to hire the services of a property solicitor who can advise you accordingly. Just to clarify, ignorance of issues detailed in the legal pack is not an excuse and certainly not a means of backing out of the deal.
What is your auction strategy?
As we touched on above, it can be very easy to get carried away at a property auction and overpay for a property. We are assuming that you have done your homework beforehand, visited the property and looked at the legal pack. It makes sense to discuss the potential value with your mortgage broker and between you decide upon a strategy which they will support. If you overpay for a property do not expect your mortgage broker to cover the excess. Indeed, you may find it very difficult to get any money out of them if you agree the mortgage figure in principle using a maximum bid value (which you exceed).
You will often hear stories of individuals turning up at auctions to bid on a particular property and they end up “getting a bargain” on another property. In reality, these scenarios are very much few and far between and you do have to wonder whether they are all true?
Paying your 10% deposit
While you have 28 days to complete the purchase of an auction property you will need to pay a 10% deposit and any auction fees before you leave the auction house. So, make sure you have the funds available and make sure that you have your bank card with you. Auction houses won’t accept cheques or delayed payments; they will accept cards and immediate transfers. If for some reason you decide to back out of the transaction, you will still be legally obliged to pay the deposit and the auction fees. In the event that you fail to complete the purchase after paying the deposit you will simply lose your deposit. The property will then be resold.
There are many areas of the property purchase process which will require varying degrees of legal input. It is essential that you appoint a property solicitor to act on your behalf sooner rather than later. You may be able to obtain recommendations from the auction house although sometimes you get the impression there may be some kind of commission based arrangement between these parties. In hindsight, it is better to have your own contacts or ask friends, family and acquaintances in the property business who they would recommend. Where solicitor’s fees are involved, it is very much a case of you get what you pay for. Saving a few pounds with an underqualified solicitor may seem like a bargain at the time but it could end up costing you a fortune.
While it is wrong to suggest there are no bargains at property auctions any more, it is also wrong to suggest this is a form of easy money. You need to have your wits about you, do your research, arrange your finance and have advisers in place before even considering an offer. Fail to prepare, prepare to fail and it could cost you a lost deposit. Joking aside, if you split down the various actions required when looking at an auction property it is much easier. From research to finance, auction strategies to legal advice, look at them in isolation and it is not as daunting. Good luck!