Auctions - Should you believe the hype?
Everyone want value for money, but at what cost?
Buying at auction
If you believe the hype, property auctions are crammed with amazing deals.
Unfortunately, being a bit good at buying stuff on eBay doesn’t automatically qualify you to pick the bargain home of the century.
It’s easy to forget that the people selling are equally convinced they will achieve a great result, hoping that punters with more optimism than experience will succumb to ‘auction fever’ and wildly overbid.
Around 30,000 properties are sold each year at auction, but these tend to be ones that are quirky and hard to value, such as those with obscure development potential or with dodgy leases, income-generating investments and odd pockets of land. Auctioneers often end up disposing of the stuff that estate agents have conspicuously failed to sell.
Mortgage lenders sometimes offload repossessions at auction, as this is a swift way to fulfil their legal duty by selling at ‘market value’, with the reserve price set in advance by a qualified valuer. Councils and housing associations dispose of large lots of properties at auction for similar reasons.
For buyers, auctions have the major attraction that when the auctioneer’s gavel falls, the deal is done, and the property is theirs upon completion. This gets around the problem of lengthy, slow-moving chains, which are the curse of the traditional house-buying process.
However, uncertainty isn’t entirely eradicated. Properties are sometimes mysteriously withdrawn prior to auction or you may get outbid, so all the money spent up front on surveys and legal fees may be wasted. But these are risks that you also face with conventional property transactions.
Before wading in and bidding, it’s advisable to first do a dry run and sit through an auction to ‘get the feel of it’.
Start by contacting auction houses to request catalogues, which sometimes need to be ordered via premium rate phone numbers. Subscribing to mailing lists can cost from about £15 per annum, but because there are nearly 200 firms that hold property auctions around the country it may be simpler to subscribe to online listings that allow you to ‘view properties for sale at every auction in the UK’ for an annual fee of between £50 and £100.
Before you buy
To prepare for buying at auction you need to arrange all the things that house buyers normally do – just a lot quicker. Time is short. There may be only three weeks between the catalogue appearing and auction day, so it is essential to receive catalogues hot off the press, and to move quickly.
Be prepared to chase solicitors and lenders. If you do decide to take a punt on a suitable property, notify the auctioneers in advance that you’re serious about specific lots, and request that they keep you informed of any developments.
When it comes to the day of the auction, before leaving home take the precaution of phoning or checking the auctioneer’s website in case the lot you’re interested in has unexpectedly been ‘sold prior’ or ‘withdrawn prior’.
Arranging funding
You must have ready funds to put down as a deposit on auction day (normally 10 per cent of the sale price, paid by banker’s draft is acceptable, and sometimes debit cards, but not usually cash or credit cards). The remaining 90 per cent of the sale price must be in place by completion four weeks later. Auctioneers also charge a ‘buyers’ premium’ which can be anything from about £250 to 1.5 per cent of the selling price. You will, of course, have to budget for stamp duty and all the usual legal, survey and mortgage fees.
Don’t buy at auction if you first need to sell your own house to finance the new one, unless you’ve already exchanged on the sale and can co-ordinate the move. Organising a mortgage is not very different from a conventional purchase, but because of the time pressure the wheels must be put in motion as early as possible, since if you fail to complete you could lose your ten per cent deposit. Ideally it is best to obtain ready funds by remortgaging an existing property. Bridging loans or buy-to-let mortgages can be a useful method of arranging short term funding. To save time, mortgages can be agreed in principle with your lender even before the catalogue is published.
Valuing
Once you have identified a target lot, if you need mortgage funding the lender’s valuer will need to carry out an inspection, allowing sufficient time for the mortgage offer to be processed and confirmed in writing.
But it’s also essential to satisfy yourself what the property is really worth and how high you are prepared to bid.
To discover what similar nearby properties have sold for recently, view Land Registry sale prices online or check with local estate agents. Talk to the Council planners to see if there’s any history of planning applications that could add value.
Your solicitor must carefully inspect the ‘general conditions of sale’ (along with any ‘special conditions’) published in the catalogue. Legal packs held by the auctioneer should contain all necessary searches, Land Registry office copies and details of leases etc.
Always scrutinise the ‘addendum’ in the catalogue, which will contain amendments to any descriptive errors as well as important additional legal information.
It’s possible that some killer fact that significantly affects the value could be buried here. As per normal, your solicitor will need to check the contract and get answers to enquiries.
Survey
Defects such as serious damp, dry rot and structural problems won’t be advertised. It is very much a case of caveat emptor, so it is essential to arrange a private survey – or at least a take a ‘walk around’ accompanied by a knowledgeable professional, who may also be able to provide a ballpark figure for ‘refurb’ costs, upon which you can base your maximum bid.
Viewing
Group viewings are normally prearranged at fixed times, perhaps on three or four separate days, details of which are listed in the catalogue. It may not always be possible to view tenanted properties. When you’re at the property, check that the boundaries on site correspond to those shown in the documentation.
Bidding
Never bid on a property unless you have already viewed it, surveyed it, checked the legals and sorted the funding. On the morning of the auction, phone to confirm that your chosen lots are still available.
Always set yourself a maximum price and stick to it (the lender’s loan-to-value lending ratio may limit how high you can afford to go).
Properties are marketed with ‘guide prices’ which are supposedly ‘an indication of the price the seller is hoping to achieve’.
In reality they are often pitched significantly below the likely final sale price to cunningly entice wide-eyed buyers. There will also be a secret ‘reserve price’ which is the minimum the seller will accept.
Although reserves are never disclosed, once the bidding exceeds this figure the seller is then legally obliged to sell the property to the highest bidder.
Don’t worry about a bit of involuntary nose-scratching – the auctioneer can spot the difference between a serious bidder and a nervous twitch. By sitting sideways on you can observe the auctioneer and notice whether they’re taking genuine bids or artificially boosting the price by ‘taking bids off the chandeliers’.
Auctioneers are known for their ability to slowly ‘charm the price’ upwards, in smaller and smaller jumps, squeezing out every last penny. If you think your nerves could become a bit jangled, you don’t actually have to be present to bid in person. You can appoint a colleague to bid for you (with written authorisation), or you may prefer to bid over the phone.
Alternatively, you can choose to bid by ‘proxy’ – similarly to the process on eBay – where you submit a maximum price you are prepared to pay, and a staff member will bid on your behalf up to that figure. If bidding is light, the property could end up being purchased for you at a lower figure.
A binding contract is entered into upon the fall of the auctioneer’s gavel, at which point your deposit will need to be paid. If a property remains unsold, sellers are often receptive to negotiating an offer after the auction. If your bid is successful, you must be ready to immediately arrange buildings insurance on property.
In a market downturn, some auction houses may relax the rules to make it easier for buyers. Some will accept smaller deposits and allow six to eight weeks to complete, rather than the standard 28 days. ‘Conditional auctions’ are a recent innovation, where the agreed sale is conditional upon buyers arranging finance after the auction, cutting wasted up-front costs in the event of an unsuccessful bid.