Buying a Property at Auction
A lot of properties with development potential are sold at auction. Auctions can be quite intimidating places for the amateur and if you are seriously interested in buying a property at auction it is a good idea to go to an auction as an observer before you go to buy something. It is still possible to buy a bargain. Unfortunately, it is just as easy to make a catastrophic mistake. If you make an offer to buy a property at auction then that offer will become immediately binding. You will have to exchange contracts immediately, pay a 10% deposit on the day and complete your purchase within the stipulated time, usually twenty-eight days. If you do not, you will lose your 10% deposit, be sued for breach of contract and be liable, to pay any shortfall between the price which you agreed to pay for the property and the amount for which it is subsequently resold. You cannot therefore bid for property until you have completed the necessary preparation.
1. Do your Homework on the Property
You will need to arrange to view the property. If it is in need of refurbishment, you will need to take your builder or surveyor with you to estimate the likely cost of necessary work. If you are unfamiliar with the area you will need to check it out carefully. Never buy a property that you have not seen, however tempting the price may seem to be. Some properties are sold at auction for what appears to be a fraction of their true value. There is nearly always a reason for this.
2. Arrange your Finances
Unless you have the cash in the bank, you must have mortgage funds in place before the day of the auction. This means that you will have to apply for a mortgage, pay the building society valuation fee and have an offer of mortgage in writing before the day of the sale (see also chapter on raising the finance). The 10% deposit must be paid on the day of the sale. You should check with the auctioneers about what arrangements are acceptable to them but most require a banker's draft.
3. Instruct your Solicitor
You will need a conveyancing solicitor lined up to check that there are no legal problems with the property or unfair terms in the contract of sale.
4. Decide on a Maximum Price
There have been many instances of inexperienced buyers getting carried away in the heat of the moment and paying far too much for a property at auction. Decide what you are prepared to bid for the property and stick to it. If you don't trust yourself to do so ask someone else to bid on your behalf.
5. Be Prepared for Abortive Costs
If you do not manage to secure the property you are interested in, you will still have to pay your solicitor and you will not be able to recover the mortgage application fee. These abortive costs will come to several hundred pounds. You may have to bear these costs several times before you secure a suitable property.
At the Auction
On the day of the auction try to arrive in plenty of time. Many auction houses require you to register as a bidder at the start of the sale. Check whether this is the case, otherwise your bid may not be accepted. Double-check the catalogue entry - you wouldn't want to buy the wrong property by accident! It has happened!
Stories of people scratching their noses and buying a house by mistake are greatly exaggerated. The auctioneer will be watching your whole body not just your hands and he will not misinterpret who is bidding and who is not.
Try to avoid making the first bid. If a property is not popular, the auctioneer may drop the opening bid to a lower level. You wouldn't want to pay more than you had to. Once you have entered the bidding, try to pause for a second or two between bids. By slowing down the pace you can help to prevent your opponent from getting over-excited and bidding more than they intended to. Finally, do not on any account bid above your previously agreed limit.
The down side of buying at auction is the high chance of incurring abortive costs (many of your opponents will be professional dealers who will be buying for cash and able to estimate their own refurbishment costs. Their costs therefore will be much lower than yours). The up side is that there are genuine bargains to be had. The dealers will typically be looking for a margin of 20% plus financing costs. This margin can be yours - if you buy wisely.
