Buying an Auction Property? Read this First!
Published on August 2, 2015 by Sarah Mac
Auction property has seen a massive boom of late. It’s likely down to the state of the economy leading to an increase in bank repossessions. And all the popular TV programmes inspiring investors to buy ‘homes under the hammer’ have also probably got something to do with it.
If buying a property at auction is something you’ve been thinking about, there’s a lot to make yourself aware of, and you should know that there can be a number of pitfalls amidst the potential benefits.
Imagine, for example, buying a property at auction then going along to see it, only to find that it wasn’t actually there anymore.
This is precisely what happened to one particular auction property buyer in Renfrewshire. Colin Todd successfully bid on a flat he considered a real bargain, thanks to its excellent location and low price. Described in the auction catalogue as an ‘interesting development opportunity for a dwelling or holiday property’, the ‘interesting’ tag certainly turned out to be apt. Interesting it was as, just a week later, it had disappeared without a trace.
One ‘interesting’ auction opportunity turned out to be a disappearing act.
What had happened? Well the local authority had decided that it was unsafe and had ordered its demolition. So Mr Todd was a property short of his investment. But this was not the only bad news he was set to receive.
Not only was he out of pocket to the tune of £37,500 for a non-existent property, he also found himself responsible for the demolition costs. If ever there was a lesson to do your homework on a property, this has to be it.
Buying at Auction: Your Legal Duties
UK law dictates that auction property buyers are contractually obliged to hand over 10% of the final price as the hammer falls. The balance is required within 28 days.
The successful bidder also becomes liable for any damage to a property as soon as the hammer falls, and this forms the most significant difference between a regular property purchase and an auction purchase.
So think of it like this: a regular property purchase offers you the benefit of time. Your offer goes in, it’s accepted, then it’s over to your solicitor to do all the standard checks and searches to make sure all is well with your investment. You won’t need to part with any funds until all this is complete, your mortgage offer (if relevant) is made and contracts are exchanged.
The auction buying process is very different. You ‘win’ the property, then regardless of any issues that may be uncovered later on, you are committed to completing the purchase. Precisely why it is so important to make enquiries and searches IN ADVANCE of making that bid.
Why is the Property Being Sold at Auction?
When you think about it, there is usually a reason a property is being sold at auction rather than through the usual channels. In a lot of cases, it is because the legal titles are not great, the condition is undesirable, or both of these. Think: is the property really the bargain that’s being advertised?
The RIGHT Course of Action
The right thing to do is take legal advice in advance. As soon as you find a property you are tempted to bid on, get a solicitor involved. Choose carefully: no all lawyers have experience in auction transactions, and some may even have a policy that they don’t deal with them.
The solicitor will need to be used to working swiftly. They’ll arrange a building survey and take a good look through the legal pack which will include things like the title deeds, searches, any special conditions of sale, copies of any leases and any responses to pre-contract enquiries.
If you don’t have the legal pack reviewed by a solicitor then, quite simply, you’ll not be aware in advance of any issues with the legal title or searches.
If you don’t have the legal pack reviewed by a solicitor then, quite simply, you’ll not be aware in advance of any issues with the legal title or searches. Think: do you really want to proceed without being armed with this information?
Yes, it will take time, and money. After all, you haven’t even got to the auction yet. But what if you place a successful bid, then later find the property is fraught with issues?
The other benefit of early legal intervention is that the whole process will be speeded up once you do win a property.
Buying at Auction: In Summary
Here’s what you need to know, in a nutshell:
- Once you have successfully bid on a property, you will be required to pay a deposit of 10% on the day of the auction. The balance will be due within 28 days. This is the case regardless of any issues that are uncovered after the bid has been accepted.
- If you find yourself unable to complete for any reason, maybe because title issues or defects with the property have led to your finance options being reduced or even thwarted altogether, you will lose your deposit. Not only this, but the seller will also reserve the right to take further legal action in order to compensate any losses as a result of the sale not proceeding.
- If a property you buy at auction transpires to have defects, there is nothing you can do about it from a legal standpoint. Legislation that protects buyers concerning faulty goods does not cover property purchases. Hence the importance of doing your homework in advance.
So, if you are considering an auction purchase, the key message is: take care. Get a solicitor on the case well before you head to the auction, and consider it an astute investment. Auction properties can prove advantageous as buy-to-lets, but only if you do your homework in advance.