How to buy a property at auction – Lucy Barber writes for PrimeResi
Auctions have seen a surge in popularity over the last few years, with an increasing number of prime properties going under the hammer.
In her article, 'How to buy property at auction', Lucy explains what prospective bidders should be aware of, and the all-important due diligence required beforehand…
It is commonly thought that buying a property at an auction is an opportunity to pick up a bargain as there is often less competition than when buying a property on the open market. The lure of a bargain should not mean that any short cuts are taken when carrying out the necessary property due diligence, otherwise it can turn into a very expensive bargain.
When buying a property at an auction, there are several important things to consider which differ from buying on the open market.
"It is quite common at auction to find properties that are being sold by a lender where the borrower has defaulted on their mortgage, so there may be limited information available."
Before the action, you would be well advised to ensure that a solicitor has reviewed any legal pack that is available for the property. In addition, they should carry out any additional searches or investigations that may be appropriate. It is quite common at auction to find properties that are being sold by a lender where the borrower has defaulted on their mortgage, so there may be limited information available. It may also mean that the owner had not been able to maintain the property, so renovations may be required. This is why seeking advice from solicitors and surveyors is very important. If works are required to be carried out, or you just wish to refurbish the property, you should ensure that there are no restrictions preventing you from doing so.
For example, a leasehold property may have restrictions in the lease which prevent you from doing the alterations you want. There can also be restrictive covenants which apply to a freehold property, which could prevent you from using the property in a manner in which you require. Therefore, it is important to get the title checked by a legal advisor.
Where there is not an opportunity to inspect the inside of the property before purchasing, you should inspect the outside of the property as that can be a good quality indication of the inside. For example, if its dilapidated and uncared for on the outside, the same should be assumed for the inside.
If you are looking to buy a block of residential flats as a ground rent investment, you should check whether or notthe provisions of the Landlord and Tenant Act 1987 (“the Act”) apply and that it has been complied with. If the landlord of a residential building (or some mixed use buildings as well) wishes to sell their building and the building is one which meets all the criteria under the Act, the landlord has to serve statutory notices to the residential tenants offering them the opportunity to buy the property at the price obtained at the auction. The notices have to be served at a specific time period before the auction. You should obtain legal advice to ensure that the statutory provisions have been followed correctly and ascertain whether the tenants have elected to take up the opportunity to purchase the property themselves. If this is the case, they are entitled to purchase the property at the price agreed at the auction. In the event the provisions of the Act are not followed, the tenants may have the right to later buy the property at the price obtained at the auction; therefore you may find yourself successfully bidding for the property, but not actually being able to complete your purchase or having to sell it to the tenants at the price you bought it for.
"The reserve price is not usually disclosed, therefore there is no guarantee that the seller will sell the property if the reserve price is not met."
You should also be aware of the meaning of reserve price. The reserve price will be the value below which the seller has indicated they would not be willing to sell the property. The reserve price is not usually disclosed, therefore there is no guarantee that the seller will sell the property if the reserve price is not met.
If you are successful in bidding for a property at an auction, you will be asked to sign the contract immediately and the completion date will be fixed. The completion timetable after exchange can vary, but it is usually a few weeks after the exchange. If you are relying on mortgage finance, you need to ensure that you have it readily available. Mortgage offers can take several weeks to come through and may not come through in time for completion. There are specialist auction finance companies which can also assist with providing quick finance but it means you won’t have available to you the wide ranging offers on the wider mortgage market.
It is therefore important to seek advice from experts if you are considering buying a property at an auction. It is paramount to do this in good time as you may struggle to find a legal advisor or surveyor if you leave it to the day before the auction. It is crucial that you seek advice to ensure your title to the property is marketable and permits you to do what you wish.
The article was first published in Prime Resi on 5 May 2022.