Buying a Property at Auction: What to Consider // February 27, 2017

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Buying a property at auction is very exciting and whilst it may also be nerve wracking, it brings a different feel to the property market. In a day and age where we like to settle into our daily lives, with a degree of monotony, an auction is a great way to switch things up. There are many bargains to be had when purchasing properties via an auction. However, there are also a few potential pitfalls and drawbacks that are worth knowing about and there are specific finance offerings such as bridging finance that should be considered.

With many repossessed properties going up for auction, doing your research into each property at your chosen auction can pay dividends. Play your cards right, do the research and cover all bases and you could net yourself a very handsome profit in a fairly short space of time.

There are however, a range of differences between purchasing properties via what many would consider the ‘traditional routes,’ for example by going to an estate agency or property broker. With auction properties, the majority of people will need to take out some kind of auction finance. This is a loan provided so that the purchaser has the funds they need ready as soon as the gavel falls and the sale is complete (Source: SPF Loans).

This also means that you should do all your homework on the property in advance, including assessing the property’s energy performance to see how efficient it is.

It is worth bearing in mind that as soon as the auctioneer has confirmed the sale of the property, the winning bidder enters into a legally binding contract and at this point the funds must be available. Also, regardless of the finance you take out or have to fund the purchase, you will need 10% of the property’s value available immediately at the auction house.

 

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Buying a property at auction can be easy

 

Advantages of buying properties at auction

Generally, the advantages of property purchases via auction will outweigh the drawbacks. There are many reasons why these auctions have remained so popular for so many years and show no signs of waning. Apart from the novelty of buying something in the ‘old fashioned’ way, there are more than a few reasons why property auctions may be the answer to your property purchase woes.

Speed and Ease of Purchase

Unlike other routes that are used to acquire properties, the process involved in buying a property at auction is very straightforward and couldn’t be quicker. The process is almost entirely designed for speed and efficiency. Whilst going through an estate agency can take months and sometimes more than a year, the sale and purchase of a property through an auction takes just a few weeks. It’s as simple as bidding, winning the property and then ensuring you pay the 10% deposit there and then. Once that is all done you just need to pay the outstanding balance, usually within 28 days.

 

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If you have the money available, the property will be yours

 

Easy property Offers

When it comes to trying to purchase a property in any other way, the chances are that you will be competing for the keys with a number of other potential purchasers and it will be the ultimate decision of the seller and/ or agent that conforms the deal. This can mean that even if you get in there first, you may not win the bidding war. With auctions though, everyone is in the room, all cards are ‘on the table’ and the final, highest bid is the winning bid.

Netting a Quick Bargain

Going to auction to find a property, no matter what it is for, provides the opportunity to discover real gems and properties for process you wouldn’t find elsewhere. There are many reasons for this but the most common reasons for being able to find great bargains come down to a desperation to sell.

For example, houses that are seized by banks and lenders from those that have had to default on loans secured against their properties need to be sold quickly. The bank or lender will need to recoup their losses as soon as possible and as long as they break even and make back what they already lent out, they will be happy to sell. This can be the difference between hundreds of thousands of pounds compared to if the property were put on the open market.

Disadvantages of Property Auctions

Yes, there may be significantly more reasons that draw you to property auctions than throw you off. However, that isn’t to say that you shouldn’t take the potential pitfalls and negatives into account. At the end of the day, a property auction is a simple and straightforward way to make a huge commitment; financially and otherwise and there can be disadvantages.

Sheer Speed

Whilst the speed of a sale is a good thing for many bidders and potential purchasers, it can also throw up a few issues. For example, it is hugely important to not get caught up in the excitement, letting adrenaline and a competitive spirit take over. The process of bidding and sealing the deal is as quick as the fall of the gavel. Therefore, if you get too caught up in the buzz of the auction, you may find yourself in trouble both legally and financially, so always take great care and don’t rush things.

Doing Your Research

As well as assessing the other buyers and deciding upon your bidding tactic, you will need to also consider the properties that are up at auction.  Sometimes, you may need to ask yourself why a property is quite as cheap as it is and why it is being put up at an auction rather than being put on the open property market where it could well fetch significantly more. Yes this could be down to a bank needing to shift the property as soon as they possibly can or as a result of the seller needing money quickly.

Make sure you have done your research for the property in question and assessed any relevant data available for it (read more).

However sometimes, the need to sell a property can be due to the condition of a property, unsavoury neighbourhoods and potential frauds or financial misgivings. It’s therefore very important to seek the advice of a surveyor and when it comes to contracts and formalities, a legal expert or solicitor in the field to make sure you don’t fall victim to a scam or hidden consequences.

 

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Make sure you check all paperwork

 

The Money

You will need to have a large amount of money available when you get to the auction house. 10% of the value of the property needs to be ready to be exchanged as soon as you win the sale. This will be tens or hundreds of thousands of pounds. For example, for a property costing £750,000 at auction, you will need to have available £75,000 from the outset as a deposit before any auction finance or loan to cover the property’s remaining cost.

After that, you will need to source the finance to cover the rest of the property’s purchase. This will likely be in the form of auction finance which has higher interest than a typical, home mortgage. In addition, even with finance confirmed, lenders will not lend you more than around 75% of the Loan to Value (LTV) of the property (the ratio of the loan in relation to the property to be purchased), so you will need to stump up further funds even after securing a loan.

In the case of the example of a property purchased at auction for £750,000, even after the 10% deposit and a 75% auction finance arrangement, you will need to find a further £112,500 to complete the sale within a 28 day period.