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Thinking Of Buying A Property At Auction? Everything You Need To Know

Zoopla: ‘Thinking Of Buying A Property At Auction? Everything You Need To Know’ By Annabel Dixon.

Auctions are an efficient way of buying property at a good price and avoiding a potentially lengthy sales process.

Property auctions are a good way to land a bargain in a quick sale that avoids a potentially lengthy, conventional buying process.

A purchase at auction is binding as soon as the winning bid is accepted, with all the benefits and drawbacks that come along with it.

Before even considering buying at auction, it’s important to know what you’re getting into and the potential pitfalls.

There are two different ways of buying properties at auction, and slightly different rules apply to each:

The traditional method is often the domain of experienced investors and cash buyers; while the modern method has opened the auction market up to residential buyers who may need a mortgage to secure their new home.

This handy guide explains the different kinds of auctions, and includes a range of tips and expert advice on what the process entails.

The Traditional Method

1. Seek out local auction houses

First off, you’ll need to track down the auction houses operating in the area you want to buy.

You can use Zoopla to search for auction properties by using “auction” as a keyword in advanced search and this should give you a good idea of the relevant auction houses. The listings should also make it clear if the property is being sold via the traditional or modern method.

Contact the auction houses directly to ask for their latest catalogues and put yourself on the mailing list for future issues. It is important to choose a regulated auctioneer, such as a NAVA Propertymark protected auctioneer.

This will guarantee that any monies you pay will be held in dedicated auction client accounts to protect both you and the seller alike.

2. Scour what’s for sale

Check out properties up for auction on Zoopla, or get your hands on the auction house catalogues. Then earmark the properties you’re interested in and contact the auctioneer to book viewings.

As a general rule of thumb, there is about a month between a property going online or a catalogue being distributed and the auction date.

3. Get your finances sorted

There’s little point choosing a property before you have the means to fund it. Although there is more flexibility when it comes to the modern, rather than the ‘traditional’, auction method (more on which, below).

So, just as if you were buying through the standard routes, unless you’re a cash buyer, you’ll need to get a mortgage Agreement in Principle (AIP) from a bank or building society or with the help of a mortgage broker.

This will provide an indication of your maximum budget, but also explain to the lender that the purpose of the loan is to fund a property at auction.

This is because you’ll have to pay a mandatory 10% of the sale price as soon as the gavel goes down, and the 90% balance 28 days thereafter. Bear in mind that it’s only 20 working days.

It is possible to get a special ‘bridging loan’ to pay for the property if the turnaround on the mortgage won’t be quick enough.

But because this type of finance is designed to be taken over the short-term, it’s very expensive. In other words, it should never be taken in the hope your mortgage will come through.

Want to know how much you could borrow? Get a 5-minute affordability check with Trussle.

A lender will also have to carry out its own valuation to check the home is adequate security for the loan you want, which can be tricky if the property is in a bad state. Most mortgage lenders won’t let you borrow against a home without a functioning bathroom and kitchen.

But, if you’re organised and thorough and the property is in a liveable condition, a mortgage is a feasible way of funding a property purchase at auction. Although, seasoned auction buyers who use the traditional route often use cash.

4. Go on viewings

When you’ve chosen the property you plan to bid on, arrange viewings with the estate agent, preferably taking an expert such as a surveyor, builder and/or architect with you to conduct a thorough inspection. Don’t be afraid to ask for as many viewings as you need.

Gather the opinions of several local estate agents for their thoughts on its value. Use our AgentFinder tool to compare all the estate gents near you. You can also try plugging the property address into Zoopla to get an estimate.

5. Instruct a solicitor and study the small print

The auction house will present you with the relevant legal pack for the property – usually for free.

This will include local searches, title deeds, an information form and a list of fixtures and fittings.

The small print here is crucial, so now is the time to instruct a solicitor to study the paperwork on your behalf and make sure it’s legitimate and watertight.

Being up to speed on the ins and outs of a property before the auction also means the solicitor will be able to hit the ground running if your bid proves successful.

6. Commission a survey

It’s not a legal requirement to commission a survey (a health check on a property) but it’s a very good idea.

Unless the property is old, listed, unusual, or in a bad state of repair, a Homebuyer’s Report may suffice. But you can find out more about the different kinds of surveys with our handy guide.

7. Don’t do your sums based on the guide price

The auction guide price, as the name suggests, is just a guide. In fact, it’s often set low in the catalogue to entice bidders and the property could sell for 10% more or even higher.

As the guide price on a property can be raised before the auction even starts, usually when it’s generated a lot of interest, make sure you monitor it closely in the lead-up to the day.

8. Get covered with insurance

As soon as you’ve successfully bid over the reserve price and the gavel comes down, the property becomes your responsibility.

This means lining up buildings insurance from that day, which will protect the bricks, mortar and structure in events such as fire or flooding.

You don’t have to take this from your mortgage lender and you can compare deals, such as via our partner uSwitch.

3 top tips for auction day

1. Be 100% prepared

You’ll typically have to bring two forms of ID to an auction, plus proof that you can afford the 10% deposit.

It’s always best for prospective buyers to check details with the auction house beforehand, though.

Leave plenty of time to register pre auction and bag a seat that gives you both good visibility of the room and the auctioneer- this might possibly be closer to the back.

2. Stick to your plan

Have a bidding strategy clear in your mind and set your maximum bid to what you know you can afford.

If you change your mind after a successful bid, the 10% deposit is non-refundable. You’re also likely to incur hefty administration fees.

3. Don’t lose heart

If you were outbid on the property you wanted in this auction sale, at least you didn’t blow your budget. And, with the experience under your belt, it could be a lot easier next time.

Q. Are you protected under the Consumer Contracts Regulations?

A. No. This really is a case of buyer beware. If you buy an item online, it falls under the Consumer Contracts Regulations and you can often return the item for a full refund under the Distance Selling Regulations.

However, at a property auction you should view the potential purchase in advance and choose whether to bid, as you won’t be protected by this law, even if you bid via live webcast.

Q. Can you avoid losing your 10% deposit if you cannot complete?

A. Once the hammer falls, you are required to pay a deposit of 10% of the purchase price. The sale then has to complete within 28 days, which means you are expected to pay the remaining 90% balance within that time-frame.

This is a legally binding contract – without provision of a ‘get-out clause’ – so consider it a non-refundable deposit meaning you must make arrangements with your mortgage lender and have a written offer before bidding on a property.

But if the lender drags its feet over your mortgage application or you lose your job unexpectedly and cannot pull the remaining funds together, will you lose the entire 10% deposit?

We asked three property experts if they could help clarify the situation on deposits put down at a traditional auction (note: the rules are slightly different for the ‘modern’ method, more on which below). Here are their responses:

Peter Mugleston, co-founder of advice portal, Online Mortgage Advisor, says: “Unfortunately, it is usually tough to get your deposit back.

“Your offer and acceptance at the point of purchase is binding, and in the contract it will state that you must pay 10% on the day, which is not refunded if you pull out.

“It is the responsibility of the buyer to ensure they have the funds available, or that they can get them in time, before making an offer on the property.

“It may be that the auctioneer and vendor are prepared to offer some flexibility – or even an extension – if you can convince them that the funds are due.

“This is unlikely, but in the rare cases where flexibility is offered, an additional fee may be levied.”

Guy Nyirenda, senior broker at mortgage brokerage, Coreco, says: “The deposit you put down is not ‘in good faith’ as the purchase is contractually binding.

“You should not bid on a property at auction unless you are sure you can complete the purchase.

“If a buyer fails to complete, technically, they will forfeit their deposit, unless they can strike a deal with the vendor and auction house, and only be hit for fees.”

Jonathan Harris, director of mortgage broker, Forensic Property Finance, says: “If you buy a property at auction, you are on the hook, and it would be difficult to wriggle out if you were to have trouble raising the balance within the tight time-frame.

“If you have a good case to argue as to why this is the case, the property could always go back into a future auction.

“However, some would then argue the property would be tainted as a result of having to be re-auctioned.

“Any resolution may therefore result in you not getting back your full 10% deposit when the property is finally sold.”

If you are in a situation where, say, your mortgage gets declined, it may still be possible to press on with the auction purchase using what is known as ‘bridging finance.’

Bridging loans are a short-term funding option. In the right circumstances, this finance can be completed in just a few days.

But you need to bear in mind that a bridging loan can be a costly way to borrow, as this type of finance is designed to be taken over the short-term, and you should generally only consider this as a last resort.

The Modern Method

The ‘modern method’ is also known as a conditional auction. A lot of the advice above applies to buying via this method, but the main difference is the modern method is slightly more flexible. It has helped open auctions up to more residential buyers (as opposed to investors and developers) thanks to the longer time frame it offers and more protection for buyers.

Using the modern method, buyers bid for an exclusive option to buy a property. The winning bidder then puts down a non-refundable reservation fee to secure the property (around 5%) on the day of the auction, usually within a couple of hours of winning. The buyer then has 28 days to exchange contracts, with a further 28 days to complete.

The reservation fee is paid in addition to the amount bid on the property. As such it should be taken into consideration when deciding how much to bid. This fee is used to pay the estate agent’s and auction house’s costs.

The reservation fee is held by the auctioneer until contracts are exchanged. This ensures the buyer is financially committed, but also means he or she cannot be gazumped.

Unlike the traditional method which legally binds the winning bidder to exchanging contracts on the day of the auction, there is slightly more wiggle room should the bidder wish to pull out – although in such cases the reservation fee is non-refundable.

In some instances of the modern method, a buyer will be required to pay a reservation deposit instead of a reservation fee. The reservation deposit paid is typically 4.2% of the purchase price, but unlike a reservation fee it forms part of the final purchase price.

Another key difference between the two auction methods is that when using the modern method, should the seller pull out of the sale, the buyer’s reservation deposit is then refunded to them.

The process is as follows:

1. Register to bid

First off, you’ll need to find properties for sale using the Zoopla search tool or by visiting auction company websites directly. You can then register online with the auction company, such as our partner iamsold, the largest residential auctioneer in the UK, to find auction dates. You can also bid online rather than on one fixed date at an auction house.

2. Study the small print

Properties are typically marketed online for up to 30 days, long enough to give you the opportunity to study the sales details, auction requirements and download any relevant legal packs.

You may also be able to view properties in person if you speak to the auctioneer.

Once you’ve pinpointed the particular property you’d like to bid on, appoint a solicitor to check over the legal paperwork and speak to a financial adviser or broker about getting a mortgage on it.

3. Bid on the property

Bidding opens for a fixed period (typically seven days). You’ll need to register your bid online, in a similar manner to how you would bid for an item on eBay.

What you will actually be bidding for is an exclusive option to buy the property.

You may bid on a property before the auction has even started or finished and the bid will be passed onto the seller. It’s then up to the seller to decide if they want to consider the offer and take the property out of the auction early.

4. Successful? Put down a reservation fee or deposit

If your bid is successful, you must hand over a reservation fee to the auctioneer and sign a reservation agreement on the day the auction concludes.

A reservation fee is typically up to 5% of your bid, but it comes on top of the winning sale price. It is non-refundable because it covers the costs of the estate agent and auction house involved in the sale.

The auction house will hold the reservation fee until contracts are exchanged. It does not legally bind the winning bidder to buy the property but reserves you the right to exchange contracts and complete on the property at the agreed price within 56 days of the bid being accepted.

Remember, a reservation fee could increase your stamp duty liability because it’s added to the sale price but counts towards the purchase price as a whole. It’s the overall purchase price that influences which stamp duty bracket a buyer falls into.

In some cases, you will be required to pay a reservation deposit rather than a reservation fee. This is different, because the deposit is deducted from the overall sale price and, if the person selling the property pulls out of the sale, the buyer’s deposit is fully refunded.

5. Sign on the dotted line

You’ll normally get 28 days to exchange contracts from the gavel going down. Use this time to instruct your solicitor to proceed, get your mortgage issued – and commission a survey of the property.

If contracts are exchanged within 28 days the deal becomes legally-binding. You’ll then have another 28 days to complete the deal.

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