Purchasing a property at auction can be a great way to land a quick sale that avoids the usual lengthy buying process. When you purchase a property at auction, it is binding as soon as the winning bid is accepted.
Here’s what you need to know about purchasing a property at auction:
There are two different ways to purchase a property at auction – the traditional method and the modern method. The traditional method usually occurs with experience investors and cash buyers. The modern method allows residential buyers to purchase a property at auction but they may need a mortgage to secure that property.
The Traditional Method of purchasing a property at auction
When using the traditional method of purchasing a property at auction, you will need to firstly seek out local auction houses, Zoopla can help you with this. However, make sure you use a NAVA Propertymark protected auctioneer. Take a look at what is for sale and the general rule is there is about a month between a property going online and the auction date.
The most important part of this process is making sure you have the finance to purchase this property. If you are a cash buyer then you are ready to go. If you aren’t then you will need to get a mortgage agreement in principle from a bank or building society. We can help you with this.
Having this mortgage in principle will give you an idea 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 important because you will have to pay 10% of the sale price as soon as you win the bid and 90% balance within 28 days (only 20 working days). It is possible to arrange a bridging loan to pay for the property if the turnaround on the mortgage won’t be quick enough.
Once you have a mortgage in principle, and you have a property you are interested in bidding on, you will need to arrange viewings. At this stage, we would advise to take a surveyor or builder/architect with you to conduct an inspection while you are there. Gather information from the estate agent as to their thoughts on its value.
When you purchase a property via this method, the auction house will provide you with a legal pack that includes information such as local searches, title deeds, list of fixtures and fittings etc. This will also have small print and it is advised that you instruct a solicitor to look over this.
At this stage, it is not a legal requirement to commission a survey but we would recommend it.
Finally, the auction price is just a guide price and is often set low to entice bidders. The house could sell for 10% more or even higher. Make sure you keep an eye on the property in the run up to the auction as guide prices can be increased before the auction begins.
The Modern Method of purchasing a property at auction
If we now focus on the modern method of purchasing a property at auction, you will see that this method is more flexible and has opened up auctions to residential buyers as opposed to investors and developers.
How does this work?
- The buyers bid for an exclusive option to buy a property.
- On the day of auction, the winning bidder then puts down a non-refundable reservation fee to secure the property which is usually around 5%.
- The buyer then has 28 days to exchange contracts with a further 28 days to complete.
- The reservation fee (used to pay the estate agent’s and auction house’s costs) is paid in addition to the amount bid on the property. Remember to take this into consideration when deciding how much to bid on a property!
- The reservation fee is held by the auctioneer until the contracts are exchanged to ensure the buyer is financially committed and no gazumping can take place.
Another key difference between the two auction methods is that when you use the modern method, the seller can pull out of the sale. If this happens the buyer’s reservation deposit is fully refunded.
To find out more about purchasing a property at auction or to arrange for a mortgage in principle for a property at auction, please get in touch.
*Please note: Your home maybe repossessed if you do not keep up repayment on your mortgage.