Fans of daytime TV will know that there is a great deal of interest in property auctions across the UK. Going to a property auction may be one way to find a low cost flat, house or commercial property.
But buying at an auction is not like buying from your friendly estate agent. We look at the pitfalls as well as the possibilities.
Why buy at auction?
Property auctions are where properties that might otherwise be difficult to sell find new owners. These may be in poor condition, large blocks that must be sold together, or homes repossessed by a lender.
Property may not be mortgageable and may need structural repair. There are also properties in good condition that (for reasons such as a marital breakup) must be sold quickly.
They can be popular with investors, keen to find property to let out, and for builders and developers wanting cheap property in need of work.
They can be bargains. But properties are sold as seen, and if the charming Georgian terrace you have bought turns out to have no floors or roof, there is not much you can do about it. When the hammer falls, it is yours.
There are greater risks buying property at auction, but if you feel that the potential makes them worth taking, there are ways to avoid them. The first is to know exactly what you are buying.
Always view a property prior to the auction day and take along a builder who can point out the problems and the cost of putting them right.
Sending in a surveyor to conduct a full structural survey might mean extra cost, but it would be well worth it if he spots something like subsidence, which might make your bargain a financial disaster.
Once you are confident that the house won’t fall down, work out what it is worth. See what similar properties have gone for, and what they make in good condition. This should tell you the maximum you should pay.
If you do make the winning bid, you pay the hammer price (which you offered) plus the auctioneer’s commission. This varies between auction houses but can add between 1% and 5%. There may be VAT on top, but this is unusual. Check the auction catalogue carefully.
You will need to pay the auctioneer before leaving the auction house, which is where things get complicated.
You are not expected to pay hundreds of thousands of pounds right away, although many property professionals do. Instead you pay a deposit, usually 10%, and have 28 days to find the remainder. If you don’t come up with the cash, you can lose the property and the deposit too.
Of course, 28 days is not enough time to arrange a mortgage, if the property can even be mortgaged.
A bridging loan, or a special kind of bridging loan known as auction finance can provide the answer. This is large scale short term lending that can be arranged in a matter of days and allow you to pay off the auctioneer. Costs are high, so it is best to use this type of finance for as short a time as possible, replacing it with a conventional mortgage if you can get one, and a development loan if can’t (although you my only be able to get this type of funding if you are a builder or developer).
Please note that bridging loans are available by referral to a master broker only.
The best course of action may be to arrange your finance before the auction, so you will know for certain just how much you can afford to bid. To find out more talk to the team at Continuum.
Your home may be repossessed if you do not keep up repayments on your mortgage.