Buying property at auction – motivations and negotiations

In our previous blog Buying a property at auction – key considerations , we covered why buying property at auction isn’t always necessarily ‘safe as houses’. Despite this, auction remains an exciting platform to buy property which, if utilized correctly, can be source of profitable property deals.

A good starting point to assess an auction property investment is to understand the seller’s potential motivations for auctioning their property. There are two main reasons a seller will opt for auction over the usual open market route:

1. There was a problem with them which meant that they did not receive an offer for their property on the open market, or the legal due diligence caused an open market offer to fall through.
2. The seller requires the property to be sold quickly.

It is important to bare these motivations in mind when negotiating for a property marketed at auction. As a buyer at auction, you are in a strong negotiating position if you have a motivated seller before you place an offer. Of course, there is no negotiating position after an auction has taken place and a deposit has been paid given this would conclude the contract. We touch on this more here Buying a property at auction – key considerations.

Motivations for Negotiation

With the above said, let’s look at two of our client’s (Jack & Joe’s) approaches to buying properties at auction:

Don’t be like Jack

Jack is a first-time buyer, who is very taken by the opportunity to get a good deal at auction. He views auction as a cheap and quick way to get on the housing ladder.

Jack signs up to auctioneers’ mailing lists and sees a 3-bed detached house in a good area which would be a great place for him to start a family. It needs a bit of work done but Jack is happy to take this on in the hope that he can add both his own personal touch and some value to the house. Giddy with excitement, he contacts the auctioneer about the property:

Jack: “I am a first-time buyer looking to buy with a mortgage. I love the property but am I a suitable buyer? I would like to offer £150,000 which will be made up of personal savings and a mortgage.”

Auctioneer: “You could absolutely be a suitable buyer. People buy properties at auction with a mortgage all the time, although it is always subject to your lender’s terms and conditions. There is a lot of interest in the property so the seller has asked whether you can up your offer to £160,000 and pay a deposit to complete today?”

J: “Excellent. I have identified a lender and their timescale for issuing a decision in principle is three working days. I was already near the top of my budget, but I can borrow from family to make the difference and can pay today. My lender’s standard completion timescales are 28 days and this should give us plenty of time.”

Jack then pays the initial fees of £20,000 (his 10% deposit (£16,000) as well as an auctioneer’s fee (in this case £4,000.00)) and approaches his solicitor.

Jack’s first request is to view the property, as he wishes to measure up his new home to order furniture and decorations. Unfortunately, this request is denied, and Jack’s solicitor cannot enforce this as there is no right under the contract to view the property until the transaction completes.

After two weeks of fulfilling administrative mortgage requirements, Jack’s mortgage provider confirms they must perform an independent valuation of the property before lending. One week later, this is performed, and the lender establishes that:

• There has been an unlawful alteration which encroaches the neighbour’s boundary
• There is Japanese knotweed in the garden

The lender, therefore, confirms that they consider the property unsuitable for lending.

Jack has no mortgage finance, and not enough time left to attempt to find alternative finance to complete the transaction within the auction timescales.

Jack loses his deposit, must pay back the additional borrowed sums from his family (which he had to borrow as he did not stick to his original budget and paid more for the property than what he wanted to) and the saving for a new deposit begins again.

Be like Joe

Joe is a seasoned property investor who has identified a suitable property for his strategy, which happens to be marketed by an auction house.

He expresses his interest with an auction house and approaches his solicitor and asks them to request the legal pack and title deeds from the auctioneer. He also asks his solicitor to order the usual conveyancing searches over the property, which the seller under the auction terms and conditions is under no obligation to provide.

Joe is taking a bridging loan to purchase the property, renovate it and take out a standard investment mortgage when it has been refurbished to its potential market value. The searches find nothing adverse and his solicitor (who is on the lender’s panel and has an existing understanding of the lender’s requirements), report to Joe and then pass the bridging lender the searches, legal pack and title deeds. The lender confirms the next day that they are provisionally content to lend and that they can get funds to Joe in 1-2 weeks.

Joe approaches the auction house and explains his circumstances. He says that his solicitor has done some due diligence, and he is happy to complete quickly. Joe asks the auctioneer what the seller’s circumstances are, and the auctioneer confirms that the property has been inherited and the seller is looking to sell quickly in order to stop paying the bills for the property.

Joe explains this situation to his solicitor and is happy with the price but wonders if there is anything that can be done to bring it down. He doesn’t want to waste too much time negotiating as the property is already on at a competitive price. His solicitor suggests that it be written in to the contract that the purchase price is £5,000 less if the transaction completes within two weeks and the asking price will be paid if completion takes place within 2-4 weeks.

The seller accepts Joe’s offer, and Joe is able to complete within 10 days. There is no ‘nasty surprises’ given the due diligence was done up front and the price reduction negotiated was enough to cover his legal fees, a family dinner to celebrate and there was even some change left over to begin the renovation!

The lesson

Speak to your solicitor first. Be like Joe, not like Jack.

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.