A guide to buying and selling property at auction.
In a property market where it can be hard to compete with other buyers and the conveyancing system sometimes moves slowly, buying a home at auction can be a quicker option.
There are two main methods of property auction, the traditional and the modern auction method. This guide will mainly look at the traditional auction method, where buyers attend an auction house where an auctioneer conducts proceedings.
It may be cheaper to buy a house at auction than buying through an estate agent in the usual way. The auction process is open and fair, with the highest bidder winning and no chance of you being gazumped. There is also no risk of a chain collapsing later on, which will often mean that a purchase falls through.
The process is usually quicker than buying in the ordinary way, with the contract being signed at the auction and completion generally taking place 28 days later.
Disadvantages include spending money on a survey and legal work on a property only to find it goes above your budget on the day. You should also make sure you understand exactly what you will be buying however. Properties sold at auction may be in poor condition or have issues that mean that the seller has chosen not to go through the usual sale route.
For sellers, auction can be a fast way of selling a property, which might be an advantage where someone wants a quick and easy completion, for example, when selling a property that forms part of a deceased’s estate.
A possible disadvantage is that the price achieved might be lower than you hoped. While you can set a reserve, if the property only just meets that sum, you could end up feeling that you might have done better to sell through an estate agent.
If you are thinking of buying a property at auction, you need to take extra care to ensure it will be a sound investment. Unless you have expertise in building and construction, you are always advised to have a survey carried out, particularly if the property is not in a good condition.
You need to have a full understanding of exactly what work will be needed to the property and how much it is likely to cost, to ensure you do not go over budget or end up taking on a bigger job than you intended or can afford.
All of your finances for the full purchase cost should be organised and ready before you go to the auction, as a deposit will be payable once the gavel has fallen and time will be very tight between exchange and completion.
You should also ask an experienced property solicitor to go through the auction pack for you. This is a bundle of all of the legal and other documents relating to the property. It will usually include relevant searches.
It may be the case that the property is being auctioned because there is an issue that might cause difficulties in a traditional sale. This could be a defect in the legal title, a lack of legal right of access to the property or restrictive covenants that apply to the property that have been breached.
Your solicitor will be able to identify any potential problems that exist and discuss the implications with you. Some may be capable of being rectified but if they are not, then they could cause an issue in due course when you come to sell.
You should turn up well in advance so that you have time to register with the auction house and check whether there is any new information available in respect of the property you are interested in. This will also give you a chance to watch the auction for a while if you are new to the process.
Your property will be listed with a guide price and will also have a reserve price, which you will not be told. If the reserve is not met, the sale will not happen.
You will usually be given a paddle with a number on it to raise when you wish to bid. Don’t feel pressured to respond quickly and make sure you know exactly how high you are prepared to go before you attend the auction. Make sure you do not go above this in the excitement of the moment.
You should have the deposit of 10% available as you will be required to pay this straight away if yours is the highest bid. You should also put insurance in place as soon as the contract has been signed.
The auction house will need two forms of identification from you. They will also need proof that you are able to pay the 10% deposit. You can check with them in advance to see what documentation they will accept to ensure that you have this available.
If you are successful at auction, you will sign the contract and your solicitor will have your copy of this. It will include details of when completion will take place, which is usually 28 days from the date of the auction.
Your solicitor will carry out the last-minute property searches and you should make sure they have the balance of purchase monies in readiness for the completion day, to include Stamp Duty.
You will only usually be able to secure a mortgage for a property that is in good condition and that has a sound legal title. Lenders often want a property to be immediately habitable, which means that some properties suitable for renovation are not likely to be mortgageable.
You will also need to have a mortgage in principle in place before you go to an auction, because there will not be enough time between exchange and completion to secure a mortgage offer from scratch.
Your lender will lend a proportion of the value of the property – not a proportion of what you are paying for it. You should bear this in mind when bidding because if you go higher than you meant to, you cannot guarantee that your lender be prepared to increase their loan.
You will need to contact your lender as soon as the auction has ended so that you can ask them to start work on approving the property. They will need your solicitor to investigate the title and confirm that it is good and mortgageable. This means that if you will be buying with a mortgage it is essential that you ask a solicitor to carry out pre-contract enquiries for you.
If your lender cannot provide funds to you in time for the completion day, you could consider a bridging loan, although this is an expensive option. However, if you fail to complete on the agreed date, you will lose your 10% deposit, so ideally you should have a back-up plan.
A modern auction is conducted by an estate agent and involves buyers submitting online bids. The estate agent will list the property for sale and buyers have a period of time in which to bid, which is generally at least four weeks. A reserve price will usually be set.
Once the bidding ends, the winner exchanges contracts. This avoids any downward negotiation of price and ties in a buyer so that there is a drastically reduced risk of the transaction falling through.
Completion will take place a set number of days later. It is open to the seller to give a longer period of time than with a traditional auction to encourage buyers who may need to secure mortgage funding.
If you want to sell a property at auction, you need to ask your solicitor to prepare an auction package. This will include a copy of the title, documents referred to in the title, searches and property information forms. By asking them to start work on this well in advance, you will have the pack available to send to prospective purchasers as soon as your property is listed for sale.
If the reserve is not met on a property that is for sale by auction, you could try approaching the seller after the auction to see if they are still prepared to sell. If your offer is close to the reserve, they could decide to go ahead with the sale anyway.
For more details about the buying and selling process, request our free conveyancing and property guide.
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