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Five golden rules for buying a house at auction

Monday 24 May 2010

By Martin Fagan martin@consumerchoices.co.uk

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Our top tips for buying a property at auction will help you avoid the usual pitfalls and hopefully turn your property-owning dream into a reality.

Auctions are one way to buy a property at a competitive price and also avoid the conventional drawn-out buying process. But be warned: there’s more to buying at an auction than just turning up and bidding in the hope of bagging a bargain.

There are pitfalls to buying houses at auction which could prove costly for those who fail to do their homework. But if you can remain unsentimental about the property you’re seeking to buy and keep a calm head in the sale room, our top five tips can help make sure you bag the right property when the hammer falls.

1. Do your groundwork

Property auctions are not for the inexperienced, faint of heart or dreamers who mistakenly think they can buy a palace for pennies.

So the first step is to familiarise yourself with a property auction by attending one as a spectator rather than a bidder. To the uninitiated, auction rooms can be forbidding places where the events seem bewildering and the action happens at a frighteningly fast pace.

Auctions are not for dreamers who think they can buy a palace for pennies

A dry run will also show that the guide price in the auctioneer’s catalogue (which appears mouth-wateringly low) often bears no relation to the price the property is sold for once the hammer falls.

Work out what the final mark-up price is on the kind of property you're after so that you can budget better.

What you want the property for - personal residential use, as a buy-to-let investment or as a renovation project to sell on at a profit - will determine where you look. Contact the relevant auction house and request their catalogue or search online at sites such as Essential Information Group where the sales of all 300 auctioneers in the UK are listed.

With the catalogue or online, decide the property you’re interested in and check the sale information for details such as guide prices, viewing times and any special conditions of sale. Check the property’s location and have a look around if you're unfamiliar with the area. If satisfied and you seriously want to bid on the property, move on to step two.

2. Solicitors, surveys and sums

Appoint a solicitor who will apply for and check the document pack relating to your lot. This costs about £75, which includes the Land Registry searches and prospective planning permission, but is not an in-depth survey or a valuation.

If there are any legal problems with the property, these will be highlighted by the solicitor who will advise on your next course of action.

If there are no legal difficulties connected with the property, the next move is to attend a viewing either with a surveyor or to arrange for one to visit at a later date. The surveyor should check the structure and fabric of the building and, based on their findings, give you a valuation. As auction properties are never in pristine condition, it might also be worth hiring a builder to estimate how much more it would cost to make the property habitable.

Consider the property’s guide price and then increase it by the percentage difference that similar properties sold for in the previous auction. Adding all these numbers together will give you an indication on your total outlay for the property and if you can afford to borrow that much.

Bear in mind though that if the property is over £125,000, you’ll have to add Stamp Duty Land Tax (SDLT) at the relevant rate for the property’s price (first-time buyers don’t pay SDLT on properties under £250,000). A lender won’t advance you any money to pay SDLT - you have to pay it out of your own pocket, so don’t forget to factor it in.

3. Arrange your finances

When you buy a property at auction, it’s imperative that your finances are in place beforehand. If you’re the successful bidder, an immediate deposit of 10% is required and the remaining 90% is due within 28 days (sales of repossessed homes often specify completion within 14 days). Failure to complete the deal within the specified date means you forfeit your deposit and the property will be re-auctioned.

So make sure your lender is able to complete your application within three weeks of the sale. A lender will need to see the surveyor’s reports, land searches, and other documents, and will insist on appointing its own surveyor (at your expense) to check the property.

You should also arrange the option of short-term buildings insurance on the property because, as soon as the hammer falls on your bid, you’re legally responsible for it. Some specialist insurance brokers will arrange cover and activate the cover when you call them from the saleroom to say your bid has been successful.

4. What to do at the auction

On the day of the auction, phone the sale room or estate agent handling the sale and double-check that the lot(s) you’re interested in are still included. Don't assume all the properties in the catalogue will be offered on the day of the auction, as some may be withdrawn or sold beforehand.

The first rule of property auctions is to set yourself a price limit and keep to it

Remember to take your cheque book and two forms of identification with you and, if possible, arrive early and familiarise yourself with the empty auction room. You may have to register as a potential bidder and be issued with a “paddle” or card as the auctioneer will only accept bids from pre-registered bidders.

Sit or stand where the auctioneer can clearly see you making a bid and bid in a bold decisive manner by raising your hand or the paddle. Listen carefully to the auctioneer's announcements at the beginning of the auction explaining the procedure and disclosing any lots sold or withdrawn prior to the sale. You should also check the addendum sheet, which reveals any errors or omissions in the catalogue and any last minute updates.

The first rule of property auctions is to abide by the Golden Rule of all auctions - set yourself a price limit and don't go above it. Avoid making the first bid - just hang back to see how the bidding pattern is developing before weighing in with a bid of your own.

Sales move rapidly and it’s easy to get caught up in the rush, so don’t get carried away; stay calm and don’t bid above your maximum.

Bear in mind the seller may have set a reserve price the lowest offer they will accept, which has nothing to do with the guide price in the catalogue and never disclosed beforehand. If the bids fail to reach this reserve it could be withdrawn from sale.

However, all is not lost: if the property you are bidding on fails to meet its reserve price then it’s perfectly acceptable to approach the owner or agent direct and make an offer. If the offer is accepted, it’s the equivalent of a successful bid.

5. After the hammer falls

When the hammer falls on your successful bid, it’s a binding commitment and carries the same legal implications as a signed contract. You now own the property and all that implies. Immediately call your insurance company and activate your buildings insurance.

Although the property is now yours and you’re liable for insuring it, you can only actually take possession of it when contracts are exchanged and the sale completed, which happens once you’ve paid the balance on the property.