If you live in the UK, it’s highly likely that you’ve stumbled across the bastion of daytime TV, Homes Under The Hammer. But whilst most of the Great British public are aware of property auctions, very few have experienced visiting or buying from one.
In this article, we seek to demystify how buying a property at auction works in the UK and what factors you need to consider prior to attending a property auction.
What you need to know before buying a property at auction
A 10% cash deposit is typically required
You will typically need to have a 10% cash deposit immediately accessible to pay the deposit once a property is secured at auction. In addition, you will need cash to pay the associated auction fees. For example, any administration charges (admin fees payable to the auction house, can be a fixed or variable fee based on sale price) or buyer’s premium (fees payable to the auction house for facilitating the sale, typically a fixed fee). The quantum of these will be listed in the property details.
You must have appropriate financing in place
Once you have paid the deposit and any relevant fees, the balance of the amount payable will fall due at completion and will be paid via your solicitor. Completion is typically required to take place within 28 days, though can vary depending on the auction you are participating in. This means you will need to have appropriate financing in place at the time of bidding at auction. Whilst it is theoretically possible to use a traditional mortgage lender, most people tend to use specialist auction finance or cash because of this time constraint. Buying a property at auction is legally binding and failure to complete within the designated time frame could lead to loss of your initial deposit.
Auction finance is a form of bridging finance which is specifically used to complete a transaction quickly. Auction finance providers are able to achieve this speed because rather than following the standard valuation process, properties are deemed to be valued at the price agreed via the auction process. Further, a higher rate of interest is charged to compensate for the additional risk taken by the provider.
Once a property is secured via auction finance, buyers will typically remortgage onto a traditional mortgage or buy-to-let mortgage as soon as possible. Auction financing providers frequently have no exit fees to facilitate this process.
Remember though, not all properties purchased at auction will be eligible for traditional residential or buy-to-let mortgages. For example, if a property does not have a working kitchen, it would be deemed uninhabitable. It is important to remember that you will not be able to remortgage such properties until you have corrected such issues. Some of these issues may not necessarily be easily remedied and thus due diligence prior to purchase is key.
Due diligence is key, do not buy on a whim
Research / legal due diligence is key when buying at auction. This means not only obtaining a strong understanding of the area you are buying in (how strong is the rental market, schools in the area, reputation, other amenities) but also visiting/inspecting the property and closely examining the legal pack that will be provided to potential bidders prior to the date of the auction.
Many buyers choose to involve a solicitor during this pre-purchase stage to review the legal pack. Advice from other professionals such as property surveyors, engineers or architects may also be sought in order to establish whether the property is structurally sound and what costs may be incurred to achieve any changes you envisage making.
Once the hammer drops, you are committed to purchasing the property irrespective of whether issues are found with the property at a later stage.
Auction guide prices are frequently exceeded
Property aggregators like Rightmove often advertise properties going to auction at their guide prices. In most cases, property sold at auction exceed this guide price quite significantly. The ‘guide price’ is a marketing price only and is often an indication of the reserve price set by the seller.
Prior to participating in an auction, do your research on house prices in the area to get a better idea of what the property is likely to sell for. Have a maximum price in mind and stick to it. Beware the risks of auction fever!
It is possible to make an offer for a property listed prior to auction
Unless explicitly stated that offers are not invited prior to auction, it is possible to make an offer. This is advised where you are particularly interested in a property as there may well be other potential acquirers also making pre-auction offers.
If an offer is accepted pre-auction, the relevant fees (buyers premium, administration fees) remain payable and the purchase would still take place under auction rules.
Anyone can buy a property at auction
There are no restrictions preventing first time buyers, private individuals or companies from buying at auction. Anyone can get involved subject to having the necessary finances in place, as described above.
Pros and cons of buying a property at auction
The main drawbacks of buying property at auction are:
- Unless you are confident in your ability to do all of the pre-purchase due diligence yourself, you will incur costs (legal costs, surveyor costs, etc) without being in exclusivity with the vendor as you would be in a traditional property transaction. Further, you will be unaware as to whether you will be able to secure the property at the price you are hoping.
- There are additional costs payable to the auction house (buyers premium, administration fee).
- Unless you are a cash buyer, you will likely need to arrange short-term auction bridging finance which typically be offered at a higher interest rate than traditional property mortgages.
- There is no ability to walk away from the deal. Once the hammer drops, you are contractually committed to purchasing the property and must pay a 10% cash deposit immediately.
On the other hand, the main advantages of buying a property at auction are:
- The transaction can be closed quickly with fixed timelines known at the point of purchase, with no chain involved.
- Once the hammer falls, you have certainty as a buyer as neither party can withdraw from the deal.
- Certain types of properties (e.g. properties needing cosmetic and/or structural work, tenanted properties) tend to be commonly listed via auction houses. Being open to purchasing property at auction therefore opens up a greater number of opportunities.
- Buying a property at auction is transparent and gives confidence that you are purchasing at market value, as you are bidding against other interested parties who are also putting their money on the table. You have reassurance that you will only pay one increment higher than the next highest bidder.
- There is actually greater potential to purchase property at below market value where a low reserve/guide price is set and for whatever reason, the bidding is not as active as expected.
- Where tenanted properties are acquired, the landlord begins receiving rent from completion date (which typically takes place within 28 days of the auction date). This enables an immediate return on capital rather than having cash tied up for a longer period of time when acquiring property via the traditional purchase process where a chain may be involved.