Unlike a more “standard” property purchase, when the hammer falls at a property auction, contracts are exchanged.
It means you are legally obliged to complete the property, often within 28 days, although the exact details will be spelled out by the auction house.
As I recently discovered when I registered to bid on a shipwreck at an online auction, it can be a brutal process for a potential bidder.
Once they have entered the auction room, whether in person or online, they have nowhere to hide and have started bidding.
Do your homework: Buying a property at auction requires being fully prepared before making any type of bid.
Bidders do not have the “cushion” that often comes with the more traditional way of purchasing a property, when they can walk away from a deal with relative ease even after their offer has been accepted, and up until the time of exchange.
Andy Thompson of Pugh Auctions explains: ‘You are preparing to take on one of the biggest financial commitments of your life, with no chance of changing your mind.
‘That focuses your mind on the reasons for doing it. There’s no turning back if you take the plunge with an offer and the deck falls.’
As I detail below in the first of a series of articles about going to auction, this meant I decided to proceed with caution. In the following articles, I will explain what happened when I entered the bidding process, but in this first installment we will look at what I did before.
Why I reduced my initial budget by £100,000
When I registered to bid on my property, the amount I was willing to pay was more than double the low six-figure guide price.
Properties often sell at auction for much more than the guide price, and serious bidders should take this into account.
I didn’t want to end up investing more money in the project than the final product would be worth.
However, at the end of the due diligence I carried out before the auction, the final maximum amount I was willing to bid was £100,000 less than I initially thought.
This was because my research revealed that there were more costs than anticipated and I didn’t want to end up investing more money in the project than the final product would be worth.
Mr. Thompson described some of the secrets of buying at auction and the preparation that needs to be done beforehand.
He said: ‘The key to buying property is giving yourself time. You need to be able to prepare.’
Preparation will include carefully reviewing the legal package and appointing a lawyer to help you with this.
The legal package will include a large number of documents, including a Energy Efficiency Certificate (EPC).
The EPC gives the buyer an indication of the current and potential energy efficiency of the property.
As such, it can help guide you as to what work needs to be done and how much you need to budget to cover the costs of that work.
Then there are “special conditions of sale”, which are in addition to the standard auction conditions.
For example, if a property was to take less than 28 days to complete, it would be highlighted here, along with any additional charges.
Property auctions in this country are now held both in person and online
Beware of ‘skeletons in the closet’
Mr. Thompson explained that it is important to examine the legal conditions.
He said: “You might be thinking you’re buying a property for £100,000, but you haven’t read the legal package and there’s £4,000 in fees in there, which can make the difference to whether you can afford to bid.” .’
He goes on to add an additional warning about skimming through these crucial legal documents.
He said: “You can end up seeing things very differently after the auction when you pick up the keys and find a skeleton in the closet.” Things may end up looking not so rosy.
‘It can cause buyer’s remorse. If you get involved in the activity before the auction, you may end up paying more than you expected.’
Andy Thompson of Pugh Auctions advises how best to proceed with purchasing at auction
Do you need to take a survey?
Some people may decide not to pay for a study on a property at auction, believing that it is not worth the cost if they do not have the guarantee of purchasing the property.
You can buy it without a survey and find out something after the deck has fallen. But by then it will be too late.
A pre-survey can also help you budget for any work that needs to be done on the property.
Thompson said: “Buying a property, especially at auction, is like watching a movie.” If you go and look at it a second time, you’ll probably see things you didn’t see the first time.
He also advises going to see the property at different times of the day.
“You can go one day at lunchtime and it’s sunny and sunny, while another day, at 3:30 p.m., the surrounding roads are full of traffic and children leaving school,” he said.
“And bring another set of eyes to see the property, as it’s good to have another perspective.”
How to finance a purchase at auction
Auction bidders must also prepare their money in advance.
According to Thompson, the misconception about auctions is that they are always for problem properties and cash buyers.
But he insists that, really, it’s for anyone. The difference is that when the deck drops, you have to buy it. That’s not something that happens when you normally make an offer.
If you can’t buy it, you could lose your deposit and be chased for any money the seller loses.
Mr Thompson said: “The reality is it almost never comes to that, and it is very rare for anyone to lose their deposit.” In 20 years of auctions, I’ve only heard of about five people who lost their deposit.’
Financing options range from cash at one end to taking out a mortgage at the other, with bridging finance in between.
This information on how to prepare to buy at auction is based on traditional auctions, including online auctions.
It is opposed to what is called a “modern method” in which the hammer falls and has not been exchanged.
In these cases, with a ‘modern method’, you have only entered a period of exclusivity. You pay a booking fee and after 28 days you have the option to switch and then a few days later you continue to complete the purchase.