Buying a property at auction – key considerations

At Gilson Gray, we are approached daily by property investors who want to:

1. Get deals done; and
2. 2. Ensure the deals they do stack up to make money. It comes as no surprise that the proposition of buying quickly (and often cheaply) at auction is an area of intrigue.

It is easy to be taken in by the Homes Under the Hammer’ clamour, but buying at auction, if not done correctly, is often not as glamourous or profitable as may be hoped. To maximize your chances of success at auction, it is important to be well prepared.

Seller’s rights

The auction platform is far more favourable to the seller than it is the buyer.

Deposit

A deposit is usually paid immediately after you place a bid for a property at auction. This is usually 10% of a purchase price subject to a minimum fee (usually of around £3,000.00). This is of course deducted from the eventual purchase price paid, however, if the buyer cannot complete the transaction, the deposit is forfeited to the seller.

Completion timescales

The standard timescale of completing an auction purchase is 28 days. Often, the legal pack (which is drawn up by the seller’s solicitor) can specify a shorter completion (e.g. 14 days).

The tight timescales are often problematic if a buyer has to get finance in place e.g. a mortgage or a bridging loan to complete a deal.

If the lender does not deal with your request quickly enough to allow you to complete within the option timescales, or there is not enough information available to satisfy the lender that they are content to lend on the property, the seller has the right to resile from the contract on account that the buyer doesn’t have the money to complete. If a buyer cannot complete within the auction timescales, the seller can retain the buyers deposit and remarket the property.

Specific Implement

If a buyer cannot complete, not only do they lose their deposit, but the seller has the right to demand that the buyer perform the original contract through the courts, rather than instead having to make do with damages to compensate for any loss suffered. Therefore, if the property is sold again under the value that a buyer had agreed for it, the seller could, in theory, raise a court action obliging the buyer to cough up the difference between the price they agreed and the price the property was eventually sold for. While uncommon, it is important to highlight this as losing a deposit is not the worst case scenario for an abortive buyer at auction.

The contract

Provisional deal – the open market contract

When buying on the open market, the due diligence is done in the normal way and includes copies of titles, numerous searches and usually numerous valuation & condition reports of a property. Purchases can also be suspensive on things like planning permissions, meaning that the buyer can resile if the property doesn’t suit their intended use case. Generally, anything that a buyer wishes to satisfy themselves on, they can do before a contract is concluded. Any due diligence requests are either dealt with prior to completion or incorporated into the contract to give the purchaser peace of mind that they know exactly what they are purchasing. This approach helps minimise nasty surprises.

Done deal – the auction contact

An auction contract is not open for negotiation as the contract is concluded when a deposit is paid. In this sense, a buyer’s job is to satisfy themselves prior to bidding and a buyer’s solicitor is to an extent ‘fighting with a hand behind their back’ if any nasty surprises emerge in the due diligence process post payment of deposit.

Lack of protection

The auction contract is a ‘stripped back’ version of the open market contract, which gives the buyer far less rights. It is drafted by the seller’s solicitor and is made up of the ‘legal pack’, usually comprising the articles of roup, minute of preference and enactment and title deeds for the property being purchased.

Fuzzy fees

There are often further fees imposed on an auction buyer that what they originally thought. These are usually part of the articles of roup and can include, but are not limited to:

• An auction buyers fee, payable to the auction house
• A buyer’s premium, meaning the buyer meets the seller’s legal fee.

It is important that a buyer reads the legal pack in full, and a shrewd buyer would offer a price which is inclusive of all fees payable.

Searching for searches

The seller is under no obligation to provide the usual searches for a property via auction. This can lead to the seller missing some vital information, such as:

• Whether there are any notices registered against the property by a local authority or managing agent which would mean a new owner would be inheriting debt
• Whether the property is connected to the usual mains services
• Whether there are any planning applications registered against the property

As solicitor of a buyer, we always recommend these searches be ordered so that you, as our client, know the most you possibly can about your investment.

A seller is also under no obligation to exhibit any surveys or valuation reports. This means that the buyer is often to an extent ‘buying blind’ and there may be defects with the property which would ordinarily be uncovered by such a report.

Auctioneer T&C’s

The auctioneers standard terms and conditions are also incorporated in to any contract. While these vary by auctioneer (and it is essential a buyer familiarizes themselves with their given auctioneers terms), example conditions to look out for are:

• Damage Provision: This holds the buyer responsible for insuring the property from the date in which they pay the deposit. If anything was to happen to the property between the deposit being paid and keys being obtained, the buyer could be liable for this. It is up to the buyer to insure the property as soon as they commit to buying it.
• The property being sold ‘tantum et tale’ or as it exists. This means that there is no liability if the property is different to the auction catalogue. It also means the buyer has satisfied themselves in respect of the property and its current condition. If, for example, an unlawful alteration had been carried out, the buyer would inherit this, and it would become their liability as owner of the property.

The conclusion

If you are thinking about buying at auction, you need to be prepared. You should:

• Be clear on your affordability
• If you are obtaining finance, be as sure as you can be that the loan will be issued within the timescales before bidding on a property
• Instruct your solicitor to do the due diligence prior to bidding
• Bid on the worst-case scenario – e.g. if there are potential defects with the property have a contingency in place to sort these

If you do this, you mitigate the risks and maximize your chance of reward for an auction purchase.

Auction is a land of opportunity, but it should be treated with caution and handled by those with experience. With expert advice, there are deals to be found and our recommendation is to always consult your solicitor before committing to a purchase.

We have a team of solicitors with a raft of experience dealing with auctions who can help you discover whether a deal is right for you. If you find a potentially suitable property, get in touch and let us help you enjoy the ride of buying at auction!

The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.