Problems With Buying Property at Auction
problems-with-buying-at-auction

Problems With Buying Property at Auction

You need to do your research

Any property developer will tell you how important it is to know your market, but at auctions, it becomes even more crucial to have a clear knowledge of the area. Auction catalogues are usually released a month before the auction itself, meaning that you only have a limited time frame to do all your research.

You should be fully armed and informed about all there is to know about the property and also the conditions under which the property is being sold when the day comes. It is essential to inspect the building yourself before the auction in case the catalogue doesn’t mention a particular feature which could drastically lower the value. The term Caveat Emptor which means, buyer be aware, applies to auction properties, probably more so that a traditional transaction.

In addition, where the property is in a significant state of disrepair, especially where the property is a fixer upper, caring out a full structural survey on the property is a must. A structural survey would typically cost around five hundred pounds. If this proves too daunting, you could bring a builder with you on your site visit to advise on the scope and costs of the renovations needed. You should also check that any proposed renovations have planning approval.

Make sure you have a conveyancing solicitor at the ready to read through the legal pack that comes with each property and check for awkward covenants or restrictions, as these could affect your plans for the property, as well as lowering its value.

Sort out your mortgage application before the auction, as you only have 28 days afterwards to pay the balance of the bid and most mortgage lenders will take far longer to approve a loan.

Look in estate agents’ windows and on previous auction sales to get an idea of the demand for and market value of similar properties.

Read the addendum sheet on the day of the auction as this reveals any mistakes or changes that may have occurred since the catalogue was published.

Calculate the maximum you’re prepared to pay and stick to it, however fevered the auction room becomes. Some unscrupulous sellers send accomplices to make fake bids to swell the price. You also need to factor in auction costs – this may include a set fee to the auction house as well as a percentage to the vendor. You should always check how much these costs are before buying to avoid being caught out.

You need money in the bank

While a bridging loan can help you to secure the property you need, you’ll still need enough money in the bank to cover the deposit, which is usually around 10%. This is especially so if you’re bidding online, as to register to buy online you must send a cheque for the full deposit before the auction. More recently and with online property auctions,  you must submit your bank account details prior to registering to bid. The auctioneer will then automatically debit your account for the sum of the deposit plus any additional fees, immediately following the auction.

You will be exposing yourself to be sued by the seller if you fail to pay the deposit on demand. The Courts will most likely favour the seller if the matter does get to this point since you have entered a legally binding contract. Please therefore only commit if you are confident you have all the money required.

Some properties will fail to sell first time around

Over a quarter of properties fail to sell at auction, and so it is not wise to base your business model around it.

When you put your property up for auction, you will need to give a reserve price, this is the lowest price you’re willing to sell at. The property will not be sold if the highest bid doesn’t reach this reserve price.

If you need the money from the sale to continue your business by purchasing or completing work on another property, you could face cash flow problems. A bridging loan can be helpful, tiding you over until you sell the property. However, these loans are short term only and late payment could result in high fees, so you must be careful to ensure that you will be able to afford to repay on time.

Another issue is that often the reserve prices for unsold properties will be made public. This means everyone will know your lowest sale price if you relist the property, putting you on the back foot for negotiations.

On the other hand, if you’re a buyer you can use this to your advantage by visiting the auctioneers the day after an auction and asking to see the list of unsold properties and their reserve prices before they go on their website.

Guide prices can be misleading

Basing your calculations of what you can afford and how much you need to borrow on the guide prices provided by the auction houses is risky, as they can’t always be trusted.

Many people assume they can get great deals at auctions because they have only checked the guide prices, but these are often less than the property’s worth. Auctioneers do this to drive up interest, as people are more likely to bid on a cheaper property, even if they end up at a higher price.

The accuracy of guide prices can vary greatly across auction houses, but generally adding 10% on to guide prices will give a more realistic look at what the property will sell for.

People often go over budget

In the heat of battle, it can be easy to get competitive with other bidders and go over budget. However, you should remember that overspending will alter your whole business plan for the property investment. This could mean having to cut back on the amount you were willing to invest in it or raise how much you rent or sell it for.

A deal is a deal

Usually, when buying a property, you can back out until the moment you sign on the dotted line. However, buying property at auction is different, under UK law a purchaser at auction is contractually bound to pay 10% of the bid price immediately, and the balance within 28 days. They also become liable for any damage to the building as soon as the hammer falls.

In one particularly extreme case, a bidder won a flat for £37,500, a bargain, or so he thought. A week later the building was demolished after council inspectors deemed it unsafe. The buyer now faces the bill for the demolition, plus the entire purchase price of a property that no longer exists. “I can’t even pick up the key because there’s no front door,” he says.

If you do back out, the seller will not refund your deposit. As well as this, they will have a right to sue you for any losses, especially if they’re forced to sell the property at a lower amount, as they clearly would in a case like the above.

For this reason, you’ll need insurance lined up before the auction to protect your investment.

It can get personal

While you may be using auctions for your business, that doesn’t mean it won’t get personal. Once you’ve been in the industry for a while, you will have attended a lot of auctions, and will start to see the same faces. While some of these people might become friends and useful contacts, others will become enemies.

This could lead to them targeting the same properties as you, purposely pushing the prices up with bids or trying to put you off during the event. It is important to remain professional and not to let this faze you, as competitiveness can lead to overpaying, which could be disastrous to your business.

Disclaimer – our articles are designed to give you guidance and information.  There is no substitute for proper direct advice, particularly as everyone’s circumstances are different.  If anything in this article may affect you, please contact us for advice that is specific to your circumstances.

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Sahar Dalini
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