Why buy a property at auction?
Why do people buy property at auction?
Buying at auction is becoming more popular, and for good reason – they’re a great way to bag a property bargain.
On top of that, you don’t have to worry about being caught up in a chain, or being gazumped – as both yourself and the seller are committed to complete the transaction within 28 days of the auction.
Many properties at auction need some TLC to bring them up to more modern standards. These properties represent a great opportunity to profit on the refurbishment and when let, will offer a stronger yield.
Are there disadvantages of buying at auction?
For all the advantages of buying at auction, there are some drawbacks.
Firstly, the fact that you’re committed to the purchase as soon as the hammer drops can be an issue as much as it’s a blessing. 28 days isn’t a long time when you’re talking about a property purchase, and if you fail to complete within this time, you’re at risk of losing your 10% deposit.
When you’ve found the perfect lot and you head to the auction to buy, you don’t know who else is heading there with the same intentions. The guide price may count for nothing if you end up in a bidding war.
When this happens, you stand to lose either way – you’re either paying more than expected for the property, or losing all of the hard work that went into researching it.
How do I find a property auction?
As a starting point, head over to the UK Auction List website, or Essential Information Group. They offer lists of all property auctions in the UK.
Once you’re on there, you can find the contact details of the auction houses in the area that you’re looking to invest in. Most auction houses send out their catalogues automatically to their mailing list, so it’d be a good idea to sign up for those.
Understanding important property auction terminology
Auction catalogue – the auction catalogue provides a description of each property, how you can view each property and the terms of sale.
Reserve price – the reserve price is the lowest price that the seller will accept. This figure is usually agreed between the seller and auctioneer and should the reserve not be met after bidding has ended, the property will remain unsold. The reserve price is not usually disclosed to bidders prior to the auction.
Exchange of contracts – where a suitable bid has been made, as soon as the auction ends, exchange of contracts takes place. Certain information is added to the memorandum of sale, and once signed (in the auction room), both buyer and seller are legally committed to complete the purchase.
Guide price – this figure is the minimum that the property is expected to sell for. In practice, this figure is usually far below the price that the property actually sells for, but can be an indication of the reserve price. The reserve price is usually no more than 10% higher than the guide price.
Legal pack – the sellers solicitor prepares a legal pack which contains all of the information that the winning bidder and their solicitor will need to complete the purchase. The legal pack is usually available for inspection prior to the auction.
Important steps prior to entering the auction
Do a ‘practice run’ – you do this by attending an auction in which you are interested in no properties, to get an understanding of behavioural patterns and how auctions are played out. This ensures you’re comfortable with your surroundings and the process when faced with the pressure of bidding on a property.
Understand the lots and arrange viewings – carefully check each lot and arrange viewings of any you are interested in and sense check the property against the description, inaccuracies could be a bad sign and require consideration. If you’re planning on doing work on the property, it may be worth bringing your builder with you to get their take on the work needed on the property.
Prepare for any required finance – make sure you prepare initial financial arrangements to ensure you can complete on any properties you plan on bidding for. The deposits needed by auction finance providers is usually higher than those for residential mortgages, so it’s important to know exactly what’s required.
Talk to your solicitor – ask your solicitor to make initial enquiries into the property to ensure there are no nasty surprises. There may be conditions in the catalogue/online that should be reviewed. It’s also worth checking that they’ll have capacity to complete the transaction within 28 days of the auction. Should your solicitor go on holiday for 14 of the 28 days, you could find yourself in a tricky spot.
Set financial boundaries – ensure you have planned exactly how much you are willing to pay for the property and do not bid above this, no matter what happens.
Getting your finances in order
As your application needs to complete very quickly, traditional mortgages can’t be relied upon. As such, these transactions are usually funded through auction finance.
Auction finance is a type of bridging loan and is designed to complete very quickly. They’re arranged as a short-term loan which is secured against property.
It’s important that you understand how bridging loans work before buying at auction. A great starting point is our detailed bridging loan guide.
Things to do on the day of the auction
Arrive early – this is a great way to make sure you’re settled and not unduly stressed before bidding even begins. Staying calm and keeping that feeling of being in control can help you to avoid making decisions in the heat of the moment that you later regret.
Prepare your documents and banking – take the required ID and make sure you can transfer the deposit – should your bid be successful. If you’re new to buying at auction, this will be a large and unusual transaction, so let your bank know that you may be making it in advance to avoid any delays.
Keep calm and stick to the plan – don’t change tactics halfway through, decisions in the spur of the moment might not prove to be wise. If you don’t win the property that you wanted, don’t bid on another one that didn’t take your fancy pre-auction. Without doing due-diligence, you can’t be sure what you’re getting yourself into.
The next steps once the auction is over
Contact your finance broker to begin the application process – this should be done straight away, remember, you only have 28 days to complete!
Get the legals moving – instruct your solicitor to begin work on the transaction. Make sure they’re comfortable with the transaction and confirm the completion deadline with them in writing.
Get your admin in order – ask for a list of required information/documents from your broker and solicitor. This way you can be sure there are no delays due to outstanding information. You will receive a lot of correspondence in a short time and it is easy to miss the small things.
Connect your professional team – it’s wise to introduce your broker and solicitor by email and encourage a collaborative approach to completing the transaction, to ensure everything runs smoothly.