Buying property at auction can be a smart way to steer clear of those uncertainties, expand your options, and (perhaps even) purchase at a discount, particularly if you are looking for unusual properties that estate agents don’t usually get involved with.
Although it has some similarities to the traditional method of buying a house, the auction process has its own elements that differentiate it from the traditional method and introduce certain risks. Don’t expect that you will find the house of your dreams on the first auction you visit.
To buy property at auction, you must first educate yourself on how real estate auctions work.
This article takes a closer look at why you may consider buying property at auction and what can be the downsides of buying property at auction (i.e. buying property at auction risks). Further, it also discusses the auction process, the costs associated with buying property at auction, and what type of properties end up in auctions.
In the end, we will leave you with some top tips on preparing for the auctions day.
When buying property at auction can be beneficial?
One of the biggest risks of buying property at auction is that you may have very limited knowledge of the property market.
With that being said, auctions are not just for the experts with insider knowledge. Knowledge regarding how property auctions work is readily available on the internet. You just have to find, sift, and assimilate the information.
However, not all of the experience you will need comes from learning about property auctions. You also need to gain practical knowledge, which can only be done through experience (i.e. once you have visited sufficient property auctions).
When the hammer strikes, there are no risks of everything falling apart at the last minute, unlike the traditional house buying method. There is no chance of gazumping and no property chains to hold up the transactions.
Compared to the traditional buying process, where one-third of the property transactions fall through, property auctions sound a lot better.
However, the process is a little different when buying property at auction. For instance, there are some additional costs involved.
How much does buying property at auction cost?
To purchase a property at an auction, you will incur the following cost:
Auction houses normally charge an administration fee for allowing you to sit in the auction. Typically, this can be a few hundred pounds.
If the house is sold to you, you will have to pay a deposit of the property (which is usually 5% - 10% of the bid).
There are also some drawbacks of buying property at auction, particularly if you have never experienced one.
Downsides of buying property at auction
One drawback to buying property at auction exists due to a feature inherent in all auctions.
It is that if you get involved in a bidding war and are unable to make the highest bid, you will lose all the money you would have invested in researching the property and having surveys carried out.
Another common misconception amongst people is to believe that auction homes are always a good deal. While tales of homes bought at below-market prices exist, the reality is that some auction homes are a good deal, and others a huge mistake.
You can avoid making that mistake by first getting yourself acquainted with the types of property sold at auctions.
While you will have all the legal documents to gain sufficient information to assess the property, here are the three common ways properties end up being auctioned off:
One way properties end up being auctioned is that the homeowner ends up in foreclosure. That’s when he or she has not paid the mortgage for at least a few months, falling into default.
Usually, the bank files a notice of default, after which the lender can put the property up for auction if the homeowner does not pay the owed balance or renegotiate the mortgage with the lender.
In a foreclosure action, the lender is not allowed to profit from the auction. So often, these properties are sold at a loss.
Property tax default auctions
The other most common way is when the owner does not pay the assessed property taxes.
In such instances, the tax authority seizes the property rather than a bank.
Mainstream buyers and sellers
In addition to the above-noted properties, mainstream buyers and sellers also choose to auction off their properties instead of choosing the traditional method.
Now that you are aware of how some properties come to be auctioned off, let’s look at how property auctions work.
How do property auctions work?
You can find various auction houses across the UK. Each auction house releases a catalogue of properties (called “lots”) to potential bidders ahead of the auction date.
Some auction houses release the auction catalogue a month before the auction date and some as little as two weeks before.
Each lot in the auction catalogue will be listed with a guide price. The guide price is only an approximation of what the seller thinks their property is worth. It is different from the reserve price. The reserve price is the minimum price the seller will accept and the reserve price is often kept confidential.
You can shortlist the properties you are interested in and ask the auctioneer for legal packs of these properties. The legal pack includes important documents such as title deeds, local authority and environmental search, fixtures and fitting content, Property Information Form, and any relevant leasehold documents (if the property is leasehold).
Instruct a conveyacer
If you have no conveyancing experience, it is best to hire a conveyancer to check the legal pack. The conveyancer can be a conveyancing solicitor or a licensed conveyancer.
The difference between a conveyancig solicitor and a licensed conveyancer is in the breath of legal services each can provide.
Even if you have some experience, hiring a conveyancer can often be better than doing conveyancing yourself.
Now, we will move on to discussing how you can prepare yourself to buy property at auction.
Measures to take before the auction date
If done right, auctions can be a great way of purchasing your next home. To do it right, you need to take some measures and prepare for it well ahead.
1.Do your research
Study the catalogue and make a list of properties you are interested in. Then get in touch with the auctioneer and arrange an appointment for viewing.
Auction properties can often be in a poor state, which can make it an absolute bargain. However, you may need some work carried out on the property, so it is best to take a builder or an architect along.
Steer clear of relying on the guide price and don't confuse it with the maximum purchase price.
At the auction, you need to bid the appropriate amount. To make sure you don’t overpay the odds, ask some local estate agents and get a better idea of average property prices in the area.
Most of all, go to a few auctions (if you haven’t already) just to see how they work.
2.Get your finances in order
However, there is little point in choosing a property before you have the means to fund it.
How to buy a house at auction with a mortgage?
Unless you are a cash buyer, you will need a mortgage agreement in principle (also called “agreement in principle” or “decision in principle”) and then finally a mortgage offer.
This will give you an indication of your budget and also inform the mortgage lender that the loan is for buying a property at auction. Mortgage lenders will carry out their own valuation to check if the property is adequate security.
A mortgage agreement in principle is not conclusive that you will be given the loan. As the name suggests, it is only an estimate of what the lender may lend to you if everything else checks out. You can learn more about it in our article on what is a mortgage agreement in principle.
Mortgages take 2-6 weeks to be arranged, but there are other financing options while you wait to secure the mortgage deal.
You will need to carry out the relevant processes and fill out the mortgage application mortgage lenders to obtain a mortgage offer. You will find a lot of mortgage deal available in the market. So it would be wise to go through our article on the types of mortgage and how to make a successful mortgage application.
3.Consider carrying out a survey
As auction properties can be in a poor state, it may be wise to get a survey of the auction property.
There are many types of home surveys.
However, if you decide to not buy the auction property after a poor survey report or if your bid is not successful, you will lose the money you would have spent.
4.Study the legal pack
Your conveyancer will study the legal packs and give you a report on the auction property. Read the report multiple times and raise any questions you have with your conveyancer.
5.Don’t rely on guide price
To attract bidders, the guide price is set lower than what the property will go for. It is also subject to change up till the date of auction.
If the guide price changes a lot during that time, it means that many people might be interested in the property.
6.Keep in contact with auction house
You should keep in touch with the auctioneer regarding the lots you are interested in to ensure that the property is available and to be informed of any alterations or amendments to the sale conditions (known as “addendum”).
Some auctions houses allow you to make an offer for a property at any time before the auction date. So your desired property may be taken off and sold even before you get a chance to bid on it.
If you want to make an offer to purchase a property, you should only do so if you can exchange contracts and pay the deposit immediately.
Tips for auction day
Hopefully, the previous paragraphs have helped you point in the right direction on what you should be doing to prepare buying property at auction. On the auction day:
It is important to get to the auction on time. Better still, get there early.
Keep your composure
Auctions can be nerve-wracking, particularly if you get involved in a bidding war. You need experience and composure to not get caught up in the moment and bid more than you can afford.
Take the necessary documentation along
If your bid is successful, you will need to give the auctioneer certain documents. You will need to ask the auctioneer what is exactly required. Generally, you will need two forms of identification and proof that you can afford the deposit.
Don’t bid first. If no bids are made, speak to the auctioneer afterwards to see if you can still purchase it privately.
Further, sit somewhere you have a clear view of all bidders rather than at the front.
You need to know the maximum bid you can afford to bid to create a bidding strategy. Stick to that strategy during the auction.
Immediate requirements after successful bid
If you make the winning bid, you will have to pay the deposit, sign and exchange contracts on the spot. Exchange of contracts binds you to complete the purchase within a specified period.
Completion of purchase
Generally, the completion deadline is 28 days. Completion is the day you pay the remaining balance consideration and get the keys to the property. If you are unable to complete, you risk surrendering the deposit and may face legal action.
A few last words about buying property at auction
Auctions can be a great way to scoop up a great deal on your next home if you know what you are doing.
Usually, you will find properties that need work and repair. So it is best to have a professional along when you go to viewings.
Once you pick out the lots you are interested in, obtain their legal pack and scrutinise it yourself and by your conveyancer. Arrange your finances before auction day. If you are not a cash buyer, you will need a mortgage offer.
On the auction day, it is vital to retain composure. Bid only to the extent you know you can afford.
That wraps up the traditional method of buying property at auction.
There is also a modern method of property auction (also called “conditional auction”). While the advice provided up stands true for most parts of modern property auctions, the difference between the two is that the modern method is more flexible. You can learn more about them in our article on modern property auctions.