Introduction
When it comes to buying a property, there are a few different routes you can go down. You can search for a property through an agent, search through online listings and go on viewings. Alternatively, you could look into buying a property at auction.
This option might seem less appealing at first since it’s not as conventional and straightforward as other methods, but it can be a great way to get your hands on a property that’s below market value.
How do auction houses work?
Auction houses work by listing property up for sale on an auction house or website. This can be done by the auction house themself or an estate agent a few months before there are plans for anyone to bid on the property.
Next, when the date of the auction comes, any interested buyers will come to the auction house or join the bid online, depending on how the bid is set up.
In order to get access to bid, buyers may have to pay an auction fee but typically, auction houses take their fee from a commission on the final purchase price of a property.
Once everyone who has signed up to bid is in the room, they are allowed to start bidding from a decided reserve price the seller has chosen. Typically, a bidder will raise their hand to agree on a price said by the auctioneer.
If the bid is online there should be a bid button or online form where bidders can input the price they want to pay.
With online bids, the auction is set for a certain time period and online bidders can see if they are the highest bidder or if their bid is higher than the reserve price right up until the completion of the auction.
Usually, properties have to be bought using auction finance or cash because mortgage lenders do not finance properties that cannot be under immediate lettable condition.
However, it is possible to have a mortgage offer in place beforehand and exchange contracts for the mortgage finance on the day of winning a property bid.
What are the pros and cons of buying a house at auction?
Why do people choose to sell at an auction? Well, the process of buying at an auction is one of the quickest ways to get a property signed for.
However, there are a sizeable number of drawbacks that may even deter the most experienced landlord. So, if you are new to owning property, starting with an easier, slower process like buying a new build using a help to by loan could be a good way to start.
Pros of buying at auction
Below are the benefits of auction houses and why they attract landlords to buy at auction.
Below market value deals
When buying a property as a landlord who knows what they’re doing, you have the knowledge to know a deal can be taken to a high value with some renovations, auctions are some of the best ways to find below-market value deals.
You can certainly beat the return from other alternative investments or your pensions by finding the right deal at auction in this way.
Lots of options
Frequently buying properties at auction can be a great way to get access to new options on the market for an investment or second home.
Because of the fast process of auctions, there is a fast rotation of new deals being bought and sold all the time. This can be a refreshing difference to an investor noticing the same property deals that can stay on the market for months.
Honest environment
With other methods of buying properties besides auctions, like landlords who buy properties off-market, the recency of your property offer really matters. For example, if a high-profile landlord has a good network, they can extract deals from the market before the general public gets to make an offer by purchasing behind the scenes. This doesn’t happen at an auction. It is as simple as the highest bidder winning.
A quick way of securing a deal
For a landlord looking to quickly sink their teeth into a deal, auctions provide a great way to do it. Through a traditional auction, in particular, you can be the owner of a new property in a matter of 28 days and perhaps renovate and refinance a property for a buy-to-let mortgage extremely quickly, pulling money out of the deal for a new deposit.
Cons of buying at auction
Before buying a property at auction it is worth going over the drawbacks so you can be aware of them and prevent obstacles from getting in your way
May not buy what you expect
The failure to do your due diligence as a bidder can leave you with a property you didn’t think had problems after the auction. For example, a property may come with problematic tenants in situ or have structural problems you didn’t observe in the first survey.
Financial uncertainty
Buying a property at auction certainly carries more risk. This is because the property finances have to be in place before you arrive at the auction to pay a 10% deposit if the auction is accepted. After this, additional costs may crop up on top of this like home insurance to let out the property or live in. Once all is considered, a property may simply become unaffordable after going over budget.
No guarantees
The reserve price of a property at auction is often set well below the future final sale price of the property. So, even if the initial price of the property seems appealing based on what you are willing to offer, the bidding war could go a lot higher than what you expected.
Risk of gazumping
There are two types of auctions, traditional and modern auctions. It is modern auctions that are less secure and could potentially result in the buyer winning an auction but still ending up without the property. If this happens the buyer has been gazumped!
This is where a buyer sells the property to another buyer who offers a higher price outside of the auction before contracts have been signed.
The seller could have simply just received a better offer and legally been able to get away from the deal because the auction hadn’t been completed yet. This is unfortunate for a seller yet always a possibility as part of an auction.
What are the different types of auctions?
If you’re not sure about the operation of an auction, it is perfectly fine to sit inside an auction house when there are bids going on without the intention of buying anything to get a feel for it and make sure when you do it for real you don’t make a rash decision or panic as things move quicker than you expected. You can search for auction houses near you here.
The traditional auction method
Also known as the unconditional method of auction, this is where contracts are exchanged immediately, locking the buyer into the deal. After this, the bidder becomes the new owner of the property 28 days later.
The modern auction method
The modern auction method is also sometimes called a conditional method of auction. This is where contracts aren’t required to be exchanged straight away. After the auction, the buyer has 28 days to exchange contracts and a further 28 days before the property legally changes hands. This allows a buyer or seller an exit from the deal.
Preparation for an auction
After you have decided to go to an auction to buy a house, there is an array of potential actions to be cognizant of before you attend and start bidding with real money.
What to do Before buying a house at auction
If you have decided to bid on a property at auction and it is a few weeks before, conducting a series of checks before you attend the auction house is best practice.
Do your Research and view the property
When visiting the property make sure you view the premises or better yet view the property multiple times throughout the day. The area could look great during the day but at night there could be antisocial behaviour or a lot of noise in the area due to a nearby school for example. You can keep this in mind when deciding on a price for the auction house.
Consider hiring a surveyor
Hiring a surveyor to get an accurate property valuation is the best way to find the most accurate value of a house. However, this brings additional costs to the process so you will have to factor this within your costs as a bidder.
Carefully scrutinise the legal pack
Before buying a property at auction the term “legal pack” may have been new to you. It is a pack of information put together by the seller or the legal team of the seller. It includes a lot of critical information such as whether the property is a freehold or a leasehold and where the boundaries of the property are.
A lot can go wrong if you do not scrutinise this document. Find it online or pick it up at the auction house.
Familiarise yourself with the guide price and reserve price
Guide prices are pieces set by the seller for what they think they will sell for. This is usually a lowball offer to encourage bidders to the auction. It is important a bidder does other due diligence and knows the offer they’re willing to put in without considering this price.
In addition, the seller will also set a reserve price which is the price the property will start at when the auction opens. Again, this price is always well below what the property will actually sell for.
Get your finances in order
It’s vital you know where the finances will come from to complete the deal of the property because auctions typically give you 28 days before contracts have to be exchanged. You can use a type of loan called auction finance if you cannot buy the property in cash.
Furthermore, you must also consider things like stamp duty and land tax or land and buildings transaction tax (If you live in Scotland) in your budget. For government advice on how to calculate these tax rates click here.
Set your budget
Considering you have done your research on a property and are confident your valuation of the premises is accurate, you can then go into the auction with this figure written down or in your head knowing you have the finance for it.
In order to protect yourself, it is crucial you don’t bid higher than this number regardless of how soon you think you’ll win the bid.
What to do the day of the auction
So, you have done your preparation for the action but what do you do on the day?
Stay calm and confident
Being calm but confident is the best way to approach an auction. This way of bidding could potentially deter other bidders from adding to their price by inspiring them to give up, not wanting to go against someone who will continue to raise their price forever as they seem confident.
Get there early
Preparation is key with auctions. Getting to the auction house early, refreshed and finding a good seat where you can see the other bidders in the room and the auctioneer may give you an advantage in bidding with confidence. Especially if you plan on staying for a while and bidding on multiple properties.
Make sure you have everything you need
There are documents you should have at the auction. This includes the legal pack for the properties you want to buy. You will also need the legal documents necessary for getting into the auction house and exchanging contracts if your bid goes through.
This includes bank details for the deposit of the poverty, personal ID, proof of residency and perhaps a bank statement. Check with the auction house beforehand for details.
Have someone bid on your behalf if necessary
If you know you cannot make it to the bid or will not be able to bid due to other reasons. Hiring someone to bid on your behalf is common in auction houses. For more on how this works click here.
Buying property at auction: What are the main risks?
There are risky scenarios you have to be aware of when entering an auction house for the first time. Some of these risks are blown out of proportion but others are essential to understand the implications of.
1. Not having enough information about the property
Because of the fast pace that an auction moves, it is tempting to see a deal that appears cheap and be tempted to bid straight away. However, there is often a reason why properties are at the auction in the first place including troublesome physical or legal dilemmas.
How this can cause legal problems
Without the right information, this can cause legal problems. For example, if you bought a property at auction as a leaseholder instead of a freeholder because you didn’t have the correct information on the property, this would be extremely restrictive when attempting renovations on the house.
2. Not being prepared in advance
Having the right information is vital when bidding on a property. However, bidders also need to be prepared. Look at the best properties in the area and their value and consider if the property is likely to appreciate over time or produce good rental yields.
After this, work backwards and consider the amount of money needed to get the property up to that standard. Sticking to this number is critical in order to have a successful day at the auction.
3. Getting carried away during the auction itself, and overpaying for the property
This risk is straightforward, if you have a price you’re willing to pay and you stick to it then there is a limited amount of risk you’re taking on. However, bidding emotionally can cause you to pay too much for the deal and shoot yourself in the foot later on if you choose to sell the property or produce profitable rental income.
So, should you buy a property at auction?
Particularly if you visit auctions at unpopular times of the year, buying a property at auction can be an excellent way to find below-market value deals. These times can include the Christmas period and potentially the summer months when schools are on holiday. There will be fewer people bidding on the same properties and a lot less competition.
In the same way, avoiding or simply being more cautious at times of the year when you know auction houses are likely to be busier is also a good idea. These times may include the end of the financial year in march.
Overall, the method of buying at auction relies on you to be creative and work well and quickly with whatever is on the market already. This is completely the opposite of carefully planning out research on a property, buying it and then renting it out over years or decades like in a build-to-rent development for example. Therefore, it is up to the landlord and their preferences,
Pro tip: If the property is left unsold you may be able to buy it privately
If you have the contact details of the seller of a property who was unable to sell their property at auction, contacting them behind the scenes can be a great way to secure a deal.
Because of the seller’s failure to exchange their property, this gives a good negotiating position to get the deal below market value as evidently there aren’t many buyers who want the property.
To conclude
Auctions are some of the easiest ways to find below-market deals but there is added risk when taking part in the process too. Preparation is key with this method. Not only do you need to do your due diligence on the properties in question but familiarising yourself with how auctions work is also essential.
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