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Landlord Tips for Buying an Investment Property at Auction

Property auctions are not for the faint of heart, as fans of Homes Under the Hammer will know. Bid on the wrong property and there is no going back. Once the gavel slams down, that property is yours, for better or worse. Unlike a regular purchase, you can’t back out of the sale.

Despite the risks, bidding on an investment property at auction could net you a bargain. Homes sold under the hammer are often priced below market value. When a property ends up in an auction, it’s usually because the lender has foreclosed, or the owner wants rid as quickly as possible. Many properties will need a lot of work, but not all are wrecks. If you’re savvy, you can pick up a bargain and make a decent return on your investment.

Here’s all you need to know about buying a property at auction, whether your plan is to flip the property, or you want to add to your buy to let portfolio.

How a Property Auction Works

In the traditional conveyancing process, the buyer makes an offer on a suitable property and for the next 6-12+ weeks, they jump through various legal hoops until contracts are ready to be signed and exchanged. At any point, the buyer can withdraw from the sale process, although they will lose the 10% deposit and the vendor may sue you for damages.

The process is different when you buy a property at auction. There is still legal work to do, but everything is sped up and the buyer has far less room for manoeuvre.

Properties are usually advertised a month before the auction date, although it can be as little as two weeks prior to sale day. There is a guide price, which gives you an idea of what the property is expected to go for, but it is only a guide, and if a property attracts a lot of interest, it could quite easily make a lot more. Some sellers also put a reserve price on a property, which is the minimum they are prepared to accept. Unfortunately, you won’t be told what this figure is.

On the day of the auction, bids are taken in-person, via telephone, and even online. The property will sell to the highest bidder. If the reserve isn’t met, it may be possible to negotiate a mutually agreeable price with the seller after the auction has ended, but don’t count on it.

As with any auction, it’s easy to get caught up in the moment and end up bidding way too much. The auction house will have verified your identity prior to the sale, so if you change your mind, it will cost you a lot of money.

Funding a Property Auction Purchase

Because the timescales of buying a property at auction are fairly short, it’s easier to be a cash buyer. But fear not if you don’t have a ton of moolah in your account, as you can still buy an auction property with a mortgage.

The standard terms and conditions still apply to mortgage funding, i.e. you must pass the affordability checks before the lender agrees to finance your purchase. It’s sensible to have your funding in place before you start looking for suitable properties being sold via auction. Any hiccups after you’ve agreed to buy the property will be costly.

Speak to a lender or mortgage broker. Explain that you wish to buy a property at auction, so they know time is of the essence. You will have to hand over 10% of the purchase price as soon as the auction ends, with the rest of the balance payable 28 days later. Therefore, the finance must be in place and the lender willing to release the funds by the required dates.

Be aware that the lender may require a property valuation before agreeing to fund the purchase. This could create problems if the property you are interested in is a ‘doer-upper’. In short, it’s best to speak to a specialist lender or broker accustomed to lending on this type of purchase. In addition, you will need to be organised if a valuation is needed prior to the auction.

Bridging Loans for Auction Properties

If mortgage funding is not available in time, your other option is to apply for a bridging loan. This provides a “bridge” between the auction house payment dates and the day the mortgage funding is released.

The main downside to using a bridging loan to fund a property auction purchase is that the interest rates are higher than regular mortgage funding. If the worst happened and you couldn’t get a mortgage, you’d be stuck in a very deep hole, financially speaking. However, if you are certain you can get a mortgage and you really don’t want to miss out on an amazing deal, it might be worth using a bridging loan, but do the maths first.

Find a Suitable Auction Property

Once you have your finance in place, it’s time to start looking for suitable properties.

Contact auction houses in the area you’re interested in. Find out what properties are coming up for auction. Most auction houses publish a catalogue of properties around one month prior to the date of the auction.

Check that the auction house is covered by the NAVA Propertymark. This ensures the auctioneer is registered with HMRC for money laundering supervision and your money won’t be funnelled into an offshore account within minutes of you coughing up.

Once you have some property catalogues, make a short-list of properties you’re interested in and contact the auction house to arrange viewings.

Viewing an Auction Property

Viewings are very important. Buying a property blind is a fool’s errand and you’ll likely end up with an expensive mistake on your books. If you live a long way from the location of the property, it might be tempting to rely on photos and virtual viewings, but this is no substitute for actually visiting the property in person.

Unless you’re a qualified surveyor/structural enginer/builder, it’s wise to take an expert along. You can book more than one viewing, so take as many experts as you need to ensure you don’t buy a property with expensive unseen problems. Most issues can be fixed and a lot of properties being sold at auction have more than their fair share, but some are worse than others. Structural problems, such as subsidence, or rampant Japanese knotweed, are all costly to fix. Houses can be rewired, replumbed, have new roofs and windows, but these all require money.

Make sure your budget covers the work needed in addition to the cost of purchasing the property. It’s pointless buying a cheap house in a property auction if you won’t actually make a profit once essential work has been carried out. Don’t forget to factor in ALL of your costs, including mortgage interest and legal fees.

While the condition of the property itself is relevant, it’s wise to pay close attention to the surrounding locale too. Often, properties end up in an auction because they haven’t sold the traditional way. This could be because the owner is in a huge hurry to liquidate their asset, but equally, it could be because nobody wanted to buy it.

Before you bid, visit the property at various times of the day. Make sure the local area will complement the tenants/buyers of your new property and vice versa – and keep an eye out for all the things that will make it very difficult to let/sell the property later.

Find an Solicitor With Property Auction Experience

Look for a conveyancing solicitor familiar with the auction process. Auction houses send out legal packs prior to sale day. They typically include local searches, details of fixtures and fittings included in the sale, title deeds, etc. It’s vital that you have a solicitor go through the information pack and contracts of sale to ensure nothing nefarious slips under the radar, such as a right of way access through the garden that belongs to a neighbouring property.

A good solicitor will work fast and meticulously, protecting your interests and meeting the required deadlines for completion of the purchase.

Conduct a Survey on the Auction Property

Unless you are using mortgage finance to purchase the property, you won’t have to pay for a survey, but since this is an expensive investment, it’s wise to pay for one anyway. Whilst you can’t use the survey to negotiate a better price with the seller, it might save you from making an expensive mistake. Yes, you may not win the property, but forking out £600 for a survey is better than being stuck with a £100k money pit or a property that’s later condemned (note: If your property is condemned you may also have to pay the demolition costs!).

In the case of newer properties with fewer issues, a Homebuyer survey is likely to be sufficient. The surveyor will use a traffic light system to assess all areas of the property: if anything is flagged up as “red”, then it definitely warrants a closer look.

If you’re looking at an older property, it’s better to go for a more in-depth survey carried out by an RICS registered building surveyor. Speak to the surveyor before they visit the property. If you have any concerns about any particular area, such as the roof, let them know.

Investigate Insurance Ahead of the Auction

Have buildings insurance set up in case you are the winning bidder. From the moment you become the proud owner of a property, it’s your responsibility. So, if an unexpected gas explosion destroys the property shortly after the auction ends, buildings insurance has you covered.

Speak to an insurer prior to the sale and arrange for a policy to start on the day of the sale. You may not have to pay anything until you activate the policy, which you can do as soon as you lodge the winning bid.

Don’t be rushed into taking out insurance via your mortgage lender. This is almost always more expensive. Speak to an insurance broker or search for a suitable policy via a comparison site.

Preparing for a Property Auction

Before you leap in feet first, watch a few episodes of “Homes Under the Hammer” and visit an auction house to see the action unfold in person. The more familiar you are with how the process works, the easier it will be when you decide to bid on a suitable property.

On the day, you’ll need to have ID and proof of deposit funds. If you’re not sure what else you need, speak to the auction house before the day of the sale, so you’re not caught out by any unexpected requirements.

When you arrive at the sale, register, and grab a seat. Some sales will be busier than others, so it’s a good idea to arrive early if you want a decent seat. Sitting at the back of the auction will give you a good view of the room and your competition. Before the sale of the property you’re interested in begins, make yourself known to the auctioneer and their spotters. Bidders often stand during the auction, so their bids can be spotted more easily.

Set an Auction Budget

Don’t start bidding on a property without knowing your upper limit. The guide price for properties being sold at auction is just that, only a guide. Depending on how much interest in the property there is, it’s likely the final sale price will be at least 10% higher, if not more. Auction houses usually set the guide price low to raise interest in the sale, and it works!

Property Auction Fees

Factor in the auction house admin fee. This can be as much as £1,000. In addition, buyers are sometimes expected to pay the vendor’s sale fees, which can soon add up. There will also be Stamp Duty payable too (3% if you’re buying a second or subsequent property).

It’s very easy to get caught up in a bidding war when you have your heart set on a property, but if you’re not careful, you will end up paying more than you can afford.

This is strictly an investment decision, so it pays to remain calm and analytical. Decide what your maximum bid is and stick to it. If you lose the property you’re bidding on, remember there will always be other sales and other properties.

When the Reserve Isn’t Met

If the seller has placed a reserve on the property and the reserve is not met, they may be willing to negotiate with the highest bidder. Don’t rush off at the end of the sale if the property you wanted isn’t sold. You could still be in with a chance if you play your cards right.

The ‘Modern Method’ of Auction

The modern method of auction is a buyer-friendly way to buy a property via an online auction. Some properties are sold this way via estate agents – usually cheaper properties where the owner wants a quick sale. It’s a good way to snap up a bargain investment property.

This type of auction works in the same way as a regular auction, but bids are placed online. The successful bidder must pay a reservation fee, which protects them from being gazumped by another buyer with more money, but they are given longer to arrange finance and complete the sale.

One point to be aware of is the reservation fee is on top of the price you agree to pay for the property, which may attract SDLT. This is not always made clear to the buyer.

What Do You Need to Know About Property Auctions?

You can’t change your mind when you buy a property at auction. Once you place the winning bid, you must pay the 10% deposit immediately, and the balance within 28 days, irrespective of your personal circumstances.

In rare circumstances, an auction house might be willing to offer a buyer some extra time to acquire the money needed to complete the sale or withdraw from the purchase altogether. However, this will cost you in terms of your deposit, fees for re-selling the property, plus any shortfall in the price you agreed to pay and the price the property makes in a subsequent sale. Some auction houses also charge interest on the unpaid balance. Vendors are also apt to sue the buyer if s/he fails to complete the sale, so be aware that you’ll have to deal with court costs as well as the loss of your deposit plus fees.

Some auction houses let buyers put an offer in before the day of the sale. It’s worth enquiring if you’re very interested in a property. The vendor might be willing to sell without going through the hassle of an auction.

Auctions are worth looking into if you have the cash or access to mortgage funding. There are bargains available, but it’s very much a case of buyer beware. Don’t bid on a property without due diligence. If you do, it could end up being a very expensive mistake.

Happy bidding!

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