Buying a property at an auction can offer a real bargain for investors and potential homeowners. With the average buyer saving up to 30% on a property, you can avoid the long application process of buying a new house and with 11 out of 12 going ahead, there is less of chance of the deal falling through or being gazumped.
Repossessed properties are commonly put on auction due to an individual defaulting on a secured loan. If the lender is looking for a quick sale, maybe to recover the debt, it is typical for the property to go to an auction. (Source: Moneywise)
Equally, if the property has been on the market for a long time and is struggling to be sold, an auction can create interest and encourage a sale at a discounted price.
If the property is deemed more valuable, it will likely go through an estate agent to attract the highest price.
Auctions can be found through estate agents, auction houses, property magazines and newspapers.
Your Property Auction Checklist
- Check the house and small print beforehand
Rather than buying on impulse, it is important to view the property inside and out, checking walls, fixtures, electricals and more. If you plan to extend the venue or do a lot of additional work to it, you should take a builder or architect with you to consider the potential and additional costs - particularly since houses on auction can sometimes be in a poor state.
Upon arrival, you should receive a legal pack from the auctioneers and it is vital to read this in detail. There could be certain legalities or clauses that will affect the value of the property such as limited planning permission or having to pay the seller's legal fees. It is advised to discuss these clauses with your solicitor or in some cases; the seller's solicitors will have this information and be able to send it to yours.
- Get a survey and a valuation
If you are serious about the property, arrange to have a survey and valuation done before the auction so you know what to expect. If the ground price you have been quoted or the bidding exceeds this value, you will realize that it is not going to be commercially viable.
- Set your budget
Calculate exactly how much you can afford to bid on the estate. It is easy to go over budget if you have been caught up in the moment of an exciting auction, or if you have invested a lot of time into the project.
However, you will be required to pay a 10% deposit there and then and must be able to complete within 28 days, so knowing how much you can afford is crucial.
Consider other fees such as legals, stamp duty, valuation fees, agent fees and building insurance. You need to factor in these costs when coming up with your budget.
How to get the finance you need
For several investors, it can be extremely tough to get a mortgage within the 28 days required or raise the finance in such a short space of time. The worst case scenario is that you lose your 10% deposit, the deal falls through, along with a possible bargain.
Some homeowners will use the equity from their initial property towards the newly auctioned one. Another option is to use a bridging loan, which is designed to bridge the gap between getting a mortgage. It is usually a temporary loan that lasts up to 2 years and the individual will not usually be required to pass a credit check, just a valuation of the property that the loan will be secured against.
Bridging loan example: Borrow £1,000,000 towards an auctioned property, up to 70% LTV, term 3-24 months, monthly interest of 0.99% to 1.5%. (Source: MT Finance)
A closed bridging loan is the term used when the investor has an exit plan to resell their property by a specific date - and this will likely strengthen their application. By comparison, an open bridging loan is one where it is open-ended and no pre-defined exit date and the lender is likely to assess this type more carefully.
So a final consideration is what you plan to do with your property. Whether you renovate it, rent it out to the public or try to resell it, it will have different impacts on your budget and return on investment.
