Buying a property at auction can be exciting. There is the potential to secure a property quickly, find something unusual or pick up a property that may not be available through the traditional estate agency market.
However, buying at auction is very different from making an offer on a property through an estate agent.
Depending on the type of auction, once your bid is accepted you could be legally committed to the purchase, with a deposit and other fees payable and a relatively short period in which to complete.
That makes preparation particularly important.
At Miles Rhodes Mortgages, our advice is simple: sort out as much as possible before you bid, not after you’ve won.
What Are the Different Types of Property Auction?
Not every property auction works in the same way. Two of the most common methods are the Traditional Method of Auction and the Modern Method of Auction.
Traditional Method of Auction
With a traditional auction, contracts will normally exchange when the hammer falls or the online auction concludes.
The successful bidder will usually have to pay a deposit immediately, commonly 10%, and completion is often required within around 20 working days, although the actual terms of the auction contract must always be checked.
This means there can be very little time to arrange a mortgage after you’ve won.
If your mortgage isn’t ready, the valuation identifies a problem or the lender subsequently refuses the property, that doesn’t necessarily release you from your contractual obligations.
Failing to complete can have serious financial consequences, potentially including loss of your deposit and other costs.
Modern Method of Auction
The Modern Method of Auction usually gives the successful bidder a longer period to arrange the purchase.
Instead of exchanging contracts immediately, the buyer will normally enter into a reservation agreement and pay a reservation fee. There is then a set period in which exchange and completion must take place.
This can provide more time to arrange a mortgage, but it shouldn’t be confused with a normal estate-agent purchase.
Reservation fees can be substantial and may be non-refundable in certain circumstances. They may also be separate from the purchase price, so buyers need to understand exactly what they are agreeing to before bidding.
The precise rules, timescales and fees vary between auction providers, so the auction terms and legal pack need to be checked carefully.
Why Buy at Auction?
There are some genuine advantages.
Auctions can provide access to properties that don’t always appear on the conventional market, including renovation projects, investment properties, unusual buildings and properties being sold by motivated vendors.
The process can also be much quicker. Rather than spending months negotiating and waiting for a chain, the timetable is normally clearly defined from the outset.
And, of course, there is the possibility of securing a property at an attractive price.
But a low guide price doesn’t necessarily mean a bargain.
The final bid may be considerably higher, and the cost of repairs, legal issues, auction fees and finance all need to be taken into account.
The Biggest Mortgage Risk
One of the biggest mistakes an auction buyer can make is assuming:
“I’ve got a mortgage Agreement in Principle, so I’m fine to bid.”
An Agreement in Principle is useful, but it isn’t a mortgage offer and doesn’t guarantee that a lender will accept the property.
You might personally meet a lender’s affordability and credit criteria while the property itself is unacceptable.
Potential issues can include:
- Non-standard construction
- Significant structural defects
- Properties without a functioning kitchen or bathroom
- Short leases
- Unusual title restrictions
- Planning or usage issues
- Properties considered uninhabitable
- Commercial elements
- Multiple units on one title
- Japanese knotweed or other property defects
- Properties requiring substantial renovation
That’s why the property itself needs just as much consideration as the person borrowing the money.
What Miles Rhodes Mortgages Recommends Before You Bid
Wherever possible, speak to us before you bid.
We can establish how much you may be able to borrow, look at your income and circumstances, obtain an Agreement in Principle where appropriate and discuss whether the proposed property appears suitable for conventional mortgage lending.
For an auction purchase, we’d also recommend that you:
Have the legal pack checked by a solicitor before bidding. It can contain information about the title, searches, leases, restrictions, special conditions and additional costs that could materially affect your decision.
Consider having the property surveyed before the auction. A lender’s valuation is primarily for the lender’s benefit and isn’t a substitute for an appropriate survey.
Understand every auction fee. Check the buyer’s premium, reservation fee, administration charges and any costs contained within the special conditions of sale.
Know the completion deadline. Don’t assume every auction gives you 28 or 56 days. Check the actual contract.
Have your deposit available. Make sure you understand how much is required, when it has to be paid and what happens to it if you cannot complete.
Discuss the property with your mortgage adviser. Give us the auction listing and legal information as early as possible. If there’s something unusual about the property, we’d rather investigate it before you bid.
What If a Normal Mortgage Can’t Complete Quickly Enough?
This is where bridging finance can sometimes be useful.
A bridging loan is short-term finance that can potentially be arranged more quickly than a conventional mortgage and can also be suitable for some properties that aren’t initially acceptable for standard mortgage lending.
For example, somebody might purchase a property requiring significant refurbishment using bridging finance, carry out the necessary work and subsequently refinance onto a conventional residential or Buy to Let mortgage.
But bridging shouldn’t simply be viewed as a quick mortgage.
It can be more expensive, there can be arrangement and other fees, and there needs to be a credible exit strategy showing how the bridging loan will ultimately be repaid.
Ideally, that strategy should be considered before bidding at the auction.
Don’t Let the Auction Decide Your Budget
Auctions are competitive by nature.
When several people are bidding and you’re only £1,000 away from securing the property, it can be very easy to keep going.
Set your maximum figure before the auction begins and remember that the purchase price isn’t your only cost.
You may also have Stamp Duty Land Tax, legal costs, auction charges, mortgage or bridging fees, valuation costs and potentially significant refurbishment expenditure.
A property that looked like a bargain at £180,000 can look very different once all the additional costs are included.
Preparation Is Everything
Buying at auction doesn’t need to be frightening. With the right property, appropriate finance and proper preparation, it can be an excellent way to buy.
The danger comes from bidding first and asking questions afterwards.
At Miles Rhodes Mortgages, we’d much rather speak to somebody before the auction, even if they ultimately decide not to bid.
We can look at the proposed purchase, discuss the likely mortgage or bridging options and help you understand the financing timetable before you commit yourself.
Seen a property coming up at auction? Speak to Miles Rhodes Mortgages before you bid and we’ll help you explore the finance options available.
Mortgage and bridging finance is subject to individual circumstances, lender criteria, valuation and underwriting. Your property may be repossessed if you do not keep up repayments on a mortgage or other loan secured against it. Bridging finance is generally short-term borrowing and can be more expensive than a standard mortgage. You should obtain independent legal advice on the auction contract and legal pack before bidding.
