Buying property at auction

A good way of picking up a property bargain is for landlords to buy at auction.

The sun has come out this week and with rental demand booming many landlords thoughts are turning to plans of expansion. The figures out this week suggest that property prices may have at last stabilised and could even be about to start on an upward trajectory

The latest residential property auction by Allsop in London on the 29th March has 54 distressed lots. This suggests there are plenty of potential property bargains out there.
Finance has been a real problem following the credit crunch in 2008. However, availability in the BTL mortgage market has slowly been improving making further purchases by landlords a realistic option.

Financing an auction purchase

For landlords that aren’t in the fortunate position of being a cash buyer they will need some kind of development or bridging finance to buy a property at auction.

According to David Sampson of Property Hawk Mortgages, it is still possible to get an advance of up to 85% of the gross purchase costs on a refurbishment property depending on property type and location.

Interest rates on this type of loan start from as low as 0.7125% per month. At the end of the refurbishment period landlords will then look to replace the bridging finance with a more permanent buy-to-let mortgage.

Where a landlord can add value to the property they will be able to leave the development profit in the property and effectively take all of their original equity on refinancing effectively securing them an investment property for nothing.
The set up fees borne by the purchaser using bridging finance vary depending on the type of property and borrowers circumstances but generally range from 1 to 2.5% of the loan amount.

David Sampson goes on to add:“Completely non-status finance is available up to 70% of open market value from some lender on residential property, even with no personal guarantees on company borrowing!”

For more details contact David at Property Hawk Commercial Mortgages.

Essentials

Buying at a property auction is a completely ‘different kettle of fish’ to buying property through private treaty. There are some essential things to bear in mind. Remember at auction you are ‘swimming with the sharks’ in the sense that you are up against a room full of professional investors and developers who will often have the edge over you. However, this shouldn’t stop you having a go. Providing you have done your research on the property, and checked all your sums. I everything ads up you could easily walk away with a steal!

The essential things to remember are:

1. You will need to pay a 10% non-refundable deposit on the day of the auction (so make sure you have the cash in your account & that you are sure before you bid)
2. Most auctions have a guide price for the property they have in their sale. Don’t pay too much attention to this. Frequently, the figure is there just to lure in ‘newby’ punters. The guide price isn’t the same as the Reserve Price. So even if the bids are more than the guide price the property may still fail to sell because the reserve has not been met.
3. There is a good reason why property ends up at auction. It’s normally where ‘wreckers’ that need full refurbishment, property with complex legal issues or distressed property end up. Beware of an attractive property that looks is if it should sold through an estate agent. There may well be a complex legal reason (such as onerous or breached covenant) that has made it unsalable in the past. Make sure you get a good solicitor who has experience at buying property at auction and get them to fully check out the property’s title fully before you enter the sale room.
4. Don’t be disheartened! It really is still possible to get a bargain. The nature of a property auction is that prices will ultimately vary on depending on who is in the sale room on that day. If it’s a wet and cold Wednesday or even a fantastically sunny Friday approaching a Bank Holiday the professional investors may not to turn up. This could give you a ‘free reign’ to bag that property bargain. Equally, if it is a very small auction that has not been publicised well; then you could end up being the only bidder in the room.

Other advice worth reading

Property Hawk has more advice on landlords buying property at auction , other information sources we recommend are this brief outline on auctions in the Financial Times and this BBC auction tips sheet from the Homes Under The Hammer progamme which contains a useful glossary.

It may also be worth reading this cautionary tale of buying at auction from the Observer.

For those landlords who are really serious about studying the data and buying property using previous sales details and area information; you want to look at EIG property auction data. They will charge several hundreds for an annual subscription to their database but their information is undoubtedly the best.

Have you got any tips or observations on buying property at auction?

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