What Are the Risks of Buying a Property at Auction?

Using an auction house is a fantastic way to buy property, land and other building types for competitive prices.

Yet, it’s important to be cautious and understand that finding a “good buy” often comes down to detailed research (due diligence) beforehand.

There are indeed many pitfalls to be aware of – especially if you’re new to buying property in this way.

Preparation and a good understanding of the ins and outs will make sure you can head into the bidding process with your eyes wide open.

In this article, we run through some of the key risks associated with buying property at auction and how to manage them in the best way.

Condition of the Property / Building

Auction properties are often sold “as is” and may be in poor condition.  Often the case with distressed property sales, this means that faults, repairs and damage will be your (the buyer’s) responsibility.

To control your risk before buying, it’s sometimes worth instructing a professional building survey. You can then factor the remediation costs into your maximum bid amount.

However, with such short timeframes and limited opportunity to dig deep, it’s often difficult to get things done on time.  It can also end up costly if you don’t end up winning multiple auction bids.

Seasoned auction buyers and professional property buyers / investors will often have a team of building experts who can help with this key process.  Others are in the building trade themselves and know what’s what.

Either way, we would never recommend bidding on an auction property without viewing.

Be wary of asking local tradespeople or “one-man bands” who may not be clued up on important issues affecting the property. Many, in our experience, will say anything to convince you to go ahead so that they can get the work.

Not Reading the Auction Legal Pack

Produced by the seller’s conveyancer, the auction legal pack is an essential series of paperwork to go through prior to bidding at auction.

It contains vital information that could affect your ability to use and sell the property.  You can also see any pending legal proceedings that could have serious implications on the future buyer. Examples include title issues, enforcement notices, encroachments, restrictive covenants, positive / negative easements or other third-party consents.

Also, be aware of the Special Conditions and what you, as the buyer, may be tied into.

Despite the cost, an auction pack legal review by a specialist conveyance can be a wise investment – especially if you’re keen on the property but have niggling doubts.

Misunderstanding of the Auction Buying Rules

The auction process itself can be fast-paced and stressful, particularly if you are inexperienced.  It is important to familiarise yourself with the auction rules and processes in good time.

Make sure you’re aware of the bidding windows so that you don’t miss out.  Also – be sure to read through the terms and conditions. These will contain all the necessary legal obligations should you win the bid.

Here at Property Solvers Auctions, for example, we run traditional and modern method auctions – with the latter having a longer overall timeframe for buyers to complete the sale.

A good auctioneer should provide guidance and support – keeping you in the loop with email notifications, for instance.

Costs of Buying at Auction

In addition to the deposit at the fall of the hammer and remaining purchase price, always remember to have the necessary funds for the following:

• Auction conveyancing fees
• Auction legal pack review (where required)
• Stamp Duty Land Tax (SDLT)
• Auction buyer fee / commission
• RICS survey / valuation fee
• Extra costs / financial obligations contained in the auction Special Conditions of Sale
• Auction bridging / mortgage finance costs including transfer fees

As a buyer, once taking ownership please also bear in mind costs such as insurance premiums, empty property council tax bills, utilities, service charges, ground rents and repairs.

Of course, if your plans are to rent or lease the property, these costs can be covered by tenants or lessee.

Inability to “Pull Out” of the Sale

There is usually no cooling-off period after an auction sale. Therefore, once the gavel falls, the sale is contractually binding.

Here, much will depend on whether you have won a traditional (28-day) or modern (56-day) auction bid.

With 28-day auctions, at this juncture, you must typically pay a 10% deposit alongside auctioneer fees and for any legal work your conveyancer has undertaken.  Withdrawing now is a breach of contract and means you could potentially lose all of these costs.

With 56-day auctions, as contracts are exchanged after 28 days, pulling out of the sale would mean that you would lose the buyer (or reservation) fee.  The solicitor will probably also charge abortive costs.

Depending on the terms and conditions, some auctioneers also oblige buyers to cover the shortfall between the original withdrawn and final sale prices (assuming it’s lower).

As a result, it’s important to be absolutely certain that you want to purchase the property before bidding.

Not Reading the Property Particulars Properly

Whilst auctioneers have a responsibility to give a true and accurate description of the property for sale, it’s important to check the listing and/or catalogue carefully.

You may, for example, be able to withdraw your bid if there is no clear indication that the property is for cash buyers only or unmortgageable.

However, you’re unlikely to protected against issues such as latent defects or if you realise that the property needs more work than originally anticipated.

Planning Restrictions

The property may be subject to planning constraints or other legal issues.  These could impact its value or make it difficult to sell or even rent / lease.

Again, undertaking due diligence is key to mitigating this risk.

One of the best ways to do this is by entering the postcode into the local authority’s planning portal and check any pending or granted applications (with the property up for sale or any nearby buildings or land). Google Maps or specialist software such as Nimbus and Land Insight are also great for this kind of research.

Be sure to also check for local infrastructure projects – such as transport connections, utility and/or communication networks.  These can either have positive or negative effects on the property’s value.

Overbidding on Property at Auctions

You may get caught up in the heat of the auction and end up paying more than your budget allows.

It’s important to set a maximum limit before bidding and stick to it. If you do find yourself in a bidding war, try not to get carried away. There are always other opportunities available out there.

Remember to also do your research on property values. HM Land Registry is typically the best source of data in England and Wales.

Auction Finances Not in Order

With such strict deadlines to exchange and complete, it’s crucial to have your “ducks in a row” when it comes to having the auction funds in place.

Traditional auction buyers will need to have 10% of the purchase price ready should they win the bid. The remainder (90%) will need to be transferred within 28 days.

Modern method auction buyers have similar obligations.  The main difference is that there are an extra 28 days to exchange contracts after the hammer has fallen.

Even with a decision / agreement in principal in place (DIP / AIP), we advise buyers to steer clear of using mortgage finance. With so many regulatory hurdles and extra checks, relying on mainstream lenders to come through is often a lost cause.

Indeed, this is why most auction buyers use cash or bridging finance (despite the high interest). Many would then refinance to a more competitive pay rate afterwards, often after refurbishment.