Buying a property at auction
As well as buying an investment property through an estate agent, another option for a landlord is to purchase one at auction. In this way it’s frequently possible to obtain a property on the ‘cheap’. Particularly ones that are in need of work or where there are problems relating to occupation or ownership which makes them unattractive to a standard owner occupier.
Auctions frequently feature properties that are unusual; either in terms of location, construction or layout. These types of unique properties; whilst sometimes unattractive to the general market can make fantastic holiday lets. In these cases it is this very distinctiveness that appeals to holiday renters who frequently look for something different.
Despite the potential advantages to potential investors in terms of the type of property offered; the nature of the auction process means that the uninitiated need to be wary of the potential pitfalls. For a full list of the differences between an auction purchase and buying a property through private treaty have a look in the Landlords Bible.
Auctions – the basics
Auctions tend to fall into four categories according to their size. A summary of these are shown below in table 1.
|No of lots||Likely audience||Likely venue|
|Large composite||100+||300+||Hotel conference centre, theatre, meeting rooms|
|Medium composite||5-100||200-500||Hotel/conference centre|
|Smaller composite||2-5||10-100||Hotel, church hall, pub, restaurant, sale room|
|Single lot||1||10-75||Hotel, church hall, pub, restaurant|
The auction has often been the last resort for properties that have been unsaleable by any other means. This could be for of a number of reasons such as the property is:
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Properties that have been repossessed by the lenders often find their way to the auction rooms. Whilst it is possible to find properties that are good value for money it shouldn’t be assumed that they are all bargains. Careful research on price and other aspects should be undertaken to ensure that the property is the bargain that it might first appear.
Tenanted properties are frequently sold at auction. Particularly ones where there are sitting tenants in place and therefore there is no realistic chance of obtaining vacant possession. In these cases properties tend to be valued in terms of their future value once they become vacant, or in some cases in relation to their rental incomes i.e. their yields.
Some property investors will look to dispose of all or part of their portfolio in a single auction. Some opportunitistic buyers have bought these portfolios and then made a profit by breaking them up and selling the properties individually. Obviously this approach is particularly successful in a rising market.
Which auction house?
There are a great number of different companies that specialise in property auctions. You need to research and select the ones that are likely to carry the highest numbers of properties that you are interested in. To identify these, there are a number of things you can do:
1. keep your eyes on the local press for locally based auctions or auctioneers
2. go online and do a search
3. be observant in your locality looking out for sale boards that advertise that the property is for auction.
4. check through the publications & websites listed below for properties and auctions that might be appropriate:
auction property for sale is a website only service which enables you to search by area for properties that are up for sale in the varies UK auctions. This is particularly useful as some properties are not sold at local auctions, but in London or other parts of the country. Subscription for this service starts at just under £20 for the month, whilst an annual subscription is less than £50. A worthwhile investment for those serious about finding an auction bargain
The essential information group offers another website only service for developers and investors looking to locate potential investment properties. Established in 1990 the site carries up to 25,000 lots each year. Whilst you are able to carry out searches for property for free, to obtain detailed information you need to subscribe. Rates are available on request but should be no more than a couple of hundred pounds pa.
Estates Gazette contains a page every week of commentaries on auctions that have taken place, along with a calendar of auctions proposed for the forthcoming week. It also has a schedule of results of all the auctions throughout the country so you can see what prices the properties were sold at.
Under the Hammer provides a fortnightly list for each region of all the properties that are to be offered by auction in coming weeks. A brief description of each lot is given. A 2nd list gives results from auctions, which has taken places during the previous fortnight, including the prices at which the property sold. It also produces an annual digest of results analysed by property type and region.
Once you have worked out which auctioneers are most likely to deal with the properties you are interested in. See if you can register for their mailing list to obtain details of forthcoming events. Having sorted out where I should be looking for the property bargains, how can I spot them?
Bank & building society repossessions have always represented an opportunity for many experienced investors to pick up cheap property at auction. This is because the seller, the bank or building society in possession; needs to dispose of the property and providing they obtain an amount that covers the outstanding loan, they are not really concerned what price is achieved. How do you spot a repossessed property? Banks and building society are sometimes quite coy about selling repossessed properties, aware as they are that it is a sensitive issue. Therefore, whilst some will disclosure this fact in the auction details, others will be less than specific. Therefore, in these cases it is necessary to be observant and do a little detective work. Clues that might give a property away are if the solicitor acting for the seller has the same telephone number and address as the head office of a building society or bank. If all your detective work fails, there is always the more direct route of making a direct enquiry to the auctioneers office.
What information does an auctioneer provide?
The auctioneer will normally print detailed particulars for each property that are similar to those provided by an estate agent. These contain information about the date, time and venue of the auction. These details also tend to be listed in the auction catalogue. The catalogue and the particulars content are both controlled by the Property Misdescriptions Act 1991 as are those produced by an estate agent. Their description should give you a pretty good ‘feel’ for the property.
Things to look out for which have a large impact on the property’s value are:
1. its’ location
2. its’ condition
3. and whether the property has tenants and with the exact terms of the tenure
These details should give you sufficient information to make initial decisions on which properties match your investment criteria. Most auction details give a guide price to the expected sale price. In my experience this is normally a very cautious valuation and generally is much lower than the price realised in the sale. The auctioneers obviously don’t want to put off potential bidders! Don’t therefore rely on it as an accurate estimate. At the end of the day, there is no replacement for doing your own careful research. Given the amount of information available free on the Internet (see the Landlords Bible for a review of the best sites currently available) this is now relatively easy. With these sites it should be quite straightforward to estimate the property’s’ worth and therefore how much you wish to pay. Remember properties at auction are frequently in a poor state of repair. Therefore, if you are contemplating the refurbishment option, make sure you get a clear idea of the likely costs before you settle on your purchase price. You will probably also need a special type of development loan where the lender is prepared to lend on the basis of the properties potential value and rentability.
Having identified some potential properties the next stage is where the hard works really begins prior to the auction itself taking place.
Pre –auction preparation
Unlike the traditional method of purchasing a property through private treaty; buying at auction requires you to have done all the preparatory legal work prior to the exchange of contracts. This involves a significant amount of up front and ‘at risk’ expenditure as obviously there is no guarantee that you will be able to secure the property through the bidding process. Steps to take prior to auction:
A landlord should appoint a solicitor who will be able to do the legal checks to make sure the property you are hoping to buy is what you anticipate it is. Because the tight deadlines involved in the auction process, it is advisable to appoint a solicitor or conveyancer that:
Solicitors fees for conveyancing work for auction properties is slightly more than for the equivalent work for a private treaty transaction. Once appointed the conveyancer or solicitor should carry out the following prior to the auction taking place:
1. request the contract, searches and replies to pre-contract enquiries plus a copy of the auction catalogue
2. investigate title and raise any appropriate enquiries and also raise such pre-contract and personal searches as may be necessary, for example coal authority search, local authority searches, etc
3. report to the client on what they have ascertained from 1 & 2 and also advice them of the deposit amount they must take to the auction
4. a few days before the auction, see if there are any amendments with the sellers solicitors or auctioneer and if so relay these to their client
5. recheck the details from the sellers solicitors and see if the are any amendments and if so notify the client.
Conditions of sale
Make sure you and your solicitor inspect thoroughly the conditions of sale. These are the terms on which the successful bidder will buy the property. They regulate not only the bidding, but also any obligations the bidder is under. They give a full and definitive description of the property and prescribe what happens after the bid is successful.
What type of conditions are there?
There are generally up to 4 types of condition that apply to the sale:
These conditions may appear in several guises and in several places including in the auction catalogue; for more details see the Landlords Bible.
Arranging the finances
Having your finances in place prior to auction is important. Remember, on the day you will be required to make a deposit of 10% of the purchase price or a specified minimum sum if your bid is successful. You must therefore ensure that you are able to pay for this deposit and the balance of the purchase price 28 days later.
One of the largest difficulties of buying at auction is that you only have 28 days to arrange and pay for the final balance. In most cases this should be enough time to obtain a mortgage offer, however it is sufficiently short for this not to be guaranteed. Three weeks is the normal time frame for a mortgage offer to be made. The other major problem is that the cost of the property is not known until after the gavel goes down on the winning bid. On this basis how is it possible to finance a bid?
Financing the bid
There are a number of ways to finance your offer. As you have already seen, the process of buying at auction makes this a little less straightforward than through private treaty, because of the need to raise finance quickly. Many regular purchasers at auctions therefore use cash to fund their acquisitions. The relative cheapness of some auction property means that this is not as unrealistic as it might first appear.
Terrace houses in the north are still sold for less than £10,000. Prices have off course risen significantly over the last few years meaning that there are far fewer property bargains than there were. The advantage of a cash purchase is that it circumvents the difficulty of securing loan finance within the allotted time frame as well as also saving the associated interest and set up costs.
However, for most purchasers, particularly first timers the prospect of a cash purchase is unrealistic. In which case what are the alternatives?
There are a number of ways of going about a purchase and this will depend largely on what type of property you are purchasing and what your future intentions are for it. Property auctions as I have already said tend to attract a high proportion of properties requiring work.
This can range anything from small scale improvements, to a complete rebuild. These properties would attract a very low potential rent if any at all. This makes them generally unsuitable for a standard buy-to-let mortgage which typically requires that the rental income is sufficient to cover any mortgage payment. The only option in these cases is to either obtain a specialist mortgage that allows the purchase of properties requiring refurbishment. Again the difficulty with any mortgage is that the time frame for securing funds will be tight. Really it is necessary that the application process is started before the auction take place. It should be possible to get to a stage where an offer in principle has been received for the anticipated maximum sales price prior to the auction. Having submitted an application form and progressed it to a stage where the mortgage company needs to instruct their surveyor; this should give you adequate time following the auction to complete the process within the four weeks allowed.
An alternative and a potential back up to a mortgage would be what is called a bridging loan. This is a short-term loan that is secured on the property. These types of loans are available from a number of specialist lenders as well as banks and building societies. Rates of interests along with set up costs are higher than for standard buy-to-let mortgage. For the latest rates see our latest rates.
Once the loan facility is in place, then funds can be drawn down easily and quickly. A bridging loan could be used for the initial purchase and during the refurbishment. On completion of the works the loan is paid off if the property is sold, or replaced with long-term finance such as buy-to-let mortgage. The amount of mortgage receivable could be up to 85% of the improved value. The disadvantage of doing it this way is that you will accrue additional interest and finance costs compared to using a buy-to-let mortgage from the outset.
Having reviewed the options for paying off the balance. What are the other costs that have to be met? I’ve summarised below the main costs that could be incurred in the purchase of a property at auction:
Buying at auction
Before you try and buy for real, it is a good idea to go for a ‘dummy run’. This involves going through the process of buying apart from the aspects of the transaction that incur expense such as the legal work, to familiarise yourself with the process. Choose one lot and then as far as possible mimic all the tasks you would with an actual auction acquisition. This will be a useful test of your understanding of what’s involved and should high light any difficulties and any mistakes you might make. This way you should be aware of the ‘pitfalls’ when it comes to the ‘real thing’.
For most auctions, you will have about a month from the initial advertisement to carry out your preparations. The timetable contained in Table 2 provides a useful guide.
Days prior to & after Auction - ACTION
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Most of you will be familiar with the comic scene of the individual who sneezes in an auction room or has a nervous tick and they end up unknowingly making the winning bid. Thankfully this doesn’t happen in real life. Auctioneers are fairly expert at spotting a genuine bid and will take them in any form; from a nod, wink, hand or verbal instruction; so don’t feel you have to make any defined gesture for your bid to be accepted.
If you are going to bid, find a position where you feel comfortable, either at the front, middle or back of the room. This will help in relaxing you and thereby hopefully make the correct choices when bidding. There is no actual evidence that where you sit has a bearing on the chances of success. Sitting at the front enables you to have high profile in front of the auction; the downside is that it is not easy to see where the competing bids are coming from so sit at the back.
The auctioneer is there to ‘encourage’ the bidders to pay the maximum price. They employ a number of techniques, but generally they cajole and bully the punters in an effort to exhort them to pay more. As the auctioneer is carrying all this out he is concentrating on three things.
Uppermost in his mind will be trying to reach the reserve price specified by the vendor so that he can achieve an effective sale. They also need to concentrate on the current bids as well as seeking movements in the audience betraying the existence of further bidders.
The auctioneer should dictate the bidding and one way that they do this is by controlling the price increments. Normally these range between 2.5% and 5% of the bid. As the price rises the increments invariably reduce as the eventual conclusion to the bidding nears. A table of the bidding ranges and increments are given below. Generally, there is an incentive for the auctioneer to keep the increments as large as possible, as this will tend to illicit the highest bid from potential purchasers.
|Bidding range||Main increments||Intermediate increments||Possible final increments|
|£1000 - £20000||£1000||£500||£250|
Types of bid
The most obvious and common form of bid is the one received directly from the person at the auction. However, there are other ways of bidding. Telephone bidding for one; another way if you don’t want to do the bidding yourself, is to employ an agent. An auctioneer, solicitor or other professional experienced in the sale room could act on your behalf. Budget at between £150-300 for this. Alternatively you could elect to make a proxy bid by instructing the auctioneers by letter, fax or e-mail to bid up to your specified limit. In both telephone and proxy bids you will still need to ensure that the 10% per cent deposit is covered.
There are various tactics that can be employed by each side in the auction house to either keep the price down or bid it up, depending on whether they act for the purchaser or seller. One tactic sometimes employed by a purchaser is to try and put off the competition by bidding high & well above the previous pattern of bids. This can have the affect of putting off the competition; particularly where the bidders were either opportunists or inexperienced.
Another trick to watch out for and one employed by the auctioneer, is to bid on behalf of the vendor when the reserve price has not been reached. This practice is perfectly legal and aims to get the price up to the reserve and thereby bring forward a sale.
Armed with all this expert knowledge and having done all your research you are now primed and ready to go. Try not to blink through or you might end up missing it. Properties tend to sell quickly; at between 20-30 lots per hour, that’s one every 2-3 minutes. Once you have started bidding remember the auctioneer is God. Their decision is final. Once a conclusion to the bidding has been reached they will identify the winning bidder. If a paddle is used, it should be through the number on the paddle; otherwise it’s likely to be by the persons clothing or where they are sitting in the room.
What happens if the lot remains unsold?
The main reason that properties remain unsold is that they have failed to meet their reserve. In these cases the properties are frequently available afterwards by negotiation. This could be an opportunity to pick up a bargain. Clearly the seller wants to sell and they will incur a fee if they leave the sales room without a ‘deal’. To find out more on how to secure an unsold bargain have a look at the Landlords Bible.
Success – not to complete
You have been successful in acquiring your chosen lots. The next stage is to check that the building is properly secure if empty, or that the tenants are notified if it is occupied. You should also arrange for insurance. Unlike a traditional sale, the standard terms of the agreement state that the insurance becomes your responsibility, even though you have still to complete the purchase.
Time is of the essence, as you will normally be expected to complete the purchase 28 days after the auction. Contact your broker or mortgage company as soon as possible and inform them that you now want to proceed. They should already have details of your solicitors and they should be instructed to liase with them direct. All parties involved should be aware of the tight deadline they are working towards. What happens if after seeing the property you change your mind?
What happens if I decide not to complete
Be under no illusion. When the gavel falls, you have entered into a contract to purchase the property. A condition of the contract is that the successful bidder exchanges contracts of memoranda and pays the deposit immediately. If you renege on the contract, the seller can take the deposit and is then entitled to resell the property. They are also allowed to claim any shortfall as a result of a resale at a lower price. The only opportunity for a purchase to extricate themselves from the contract is if the seller has significantly misdescribed the property. In these circumstances it may be possible for the contract to be cancelled because of a breach of the Unfair Contract Terms Act. This type of a situation is a rarity so ensure that you have done all your research and want the property before bidding.
This is the final part of the process. The remaining task for most purchasers is to secure the loan advance required to pay the outstanding monies. Make sure that you keep up the pressure on the finance company to ensure the process happens speedily. It’s likely that you will have held back from paying for a mortgage survey, so you will need to pay for this.
Most mortgage companies will take payment using a debit card over the phone. The surveyor should have received their instructions from the mortgage company within a few days and the survey should be completed a couple of days after that.
Following the receipt of this, the company should be in position to make you an offer. Once this is received by your solicitor, they should make their final checks and request funds from the lender for the pre-agreed Completion Date just as is the case under a private treaty. The process concludes when the funds are received by telegraphic transfer by the seller and the transfer deeds and title deeds are sent to the buyer. The property is now officially yours!
FORMS FOR LETTING PROPERTY
FINANCE AND TAX ON RENTAL PROPERTY
RENTAL PROPERTY REGULATIONS
INVESTING IN BTL PROPERTY
WHAT TO BUY
BUYING OFF PLAN
KNOWING THE RISKS
MANAGING YOUR RENTAL PROPERTY
NON - PAYMENT OF RENT
GETTING YOUR MONEY BACK
THE TENANT WONT MOVE OUT
THE TENANT DOES A BUNK
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DAMP, MOULD AND CONDENSATION
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