Buying At Auction
If you often find yourself scrolling away on Rightmove and daydreaming about how many great project properties are on the market, you’ve probably noticed a growing number of listings for sale next to the words “Guide Price”. This subtle little term indicates that the property is being sold through an auction. I was certainly very daunted by auctions when I first started investing in property and was often put off even viewing an auction property for fear that there must be something wrong with the property which would be hidden until I was already committed to the purchase. If I’m honest, it was classic fear of the unknown – I just didn’t know enough about auctions to feel comfortable giving them a go. At the time, it didn’t really affect my ability to grow my portfolio as there were plenty of properties for sale through traditional estate agents. However, over the past few years, I’ve noticed more and more vendors choosing to sell through auctions than through traditional agents. So, about a year ago, I finally took the leap and decided to learn more about auctions; how they work, the different kinds available, the risks, the benefits… what I found wasn’t the shady, deceptive world of risk I had been dreading at all.
KEY AUCTION TERMINOLOGY
Any property (normally called a “lot”) which goes to auction is advertised with a “Guide Price”. This is a figure which is meant to give an indication of the amount the property could be bought for. However, the vendor will also set a “Reserve Price”. The reserve is the lowest price the vendor will accept and the general rule is that it has to be within 10% above or below the guide price. If the bidding doesn’t reach the reserve price, the property doesn’t sell. So, if a property is advertised at a guide price of £35,000, the lowest it might actually be able to sell for could be £38,500. It’s easy to see how guide prices are often used to draw people in thinking the properties are a bargain!
WHY BUY AND SELL AT AUCTION?
For the Vendor
Sellers (or vendors) choose to sell through auctions for a number of reasons, but here are the most common:
Time certainty – as soon as a sale is agreed, the seller and buyer are both legally obligated to go through with the sale during a specified timescale (usually 28 days to complete). During a normal house purchase, a vendor could have had a sale agreed for months and committed both time and significant money to getting everything in place for the exchange of contracts, only for a buyer to pull out last minute. Not a situation anyone would like to find themselves in, let alone if you are under pressure to get the sale through for financial reasons. So, it’s easy to see how having a guaranteed timescale on the sale is an attractive alternative, especially if a vendor has already had a few sales fall through!
Lower fees – generally in most auction houses, the vendor pays the auction house far lower (if any) fees, compared to a traditional estate agent. This is obviously good for vendors who are on a strict budget, although they may end up having to accept a lower sale price in compensation.
“Fairer” competition – in a traditional house purchase, once a sale has been agreed the house gets taken off the market whilst the sale progresses to completion. But who’s to know if another buyer might have offered more the next day? Many vendors feel that by putting a property through auction, they are giving everyone a fair chance to bid at their highest offer. Arguably, just putting the property through auction could put off a number of potential buyers, but it is becoming less and less of a problem as more people get used to the auction system.
Then there is the reason that everyone fears when buying at an auction – there is something wrong with the property so the vendor is trying to get rid of it quickly so it is no longer their problem. In my experience, this is far less of an issue than I thought it would be. For a start, what might be a “problem” for one owner, might actually be completely solvable if you know what you are doing and factor in the right costs. There is a lot that you can do before an auction to mitigate the risk of any nasty surprises. See the “How to Avoid Risk” section below.
For the Buyer
Auctions can be a great place to pick up a bargain so long as you know what to look out for. These are a few of the advantages which you don’t necessarily get in a traditional house purchase:
Certainty of purchase – this is very similar to the certainty a vendor might experience in a traditional house purchase. A buyer could also be caught out by the vendor pulling out last minute, leaving you with a heap of costs for surveys, solicitors etc. and no house to buy! In an auction, if you are the successful bidder then there is very little that can come between you and the purchase getting to completion.
Upfront information – all properties which go to auction should have a legal pack with them. This should contain a full search pack (environment, local, flooding, any mining activities etc.) as well as the title documents for the property. This means you can have a look through these before agreeing a sale so that in theory there aren’t any nasty surprises when you are half way through the purchase. It is worth noting though that the contents of a legal pack can vary considerably, so you do need to know what you are looking for, or ideally get your solicitor to look over it for you (see “How to Avoid Risk”).
Speed of purchase – As soon as the hammer falls (physically or virtually!), contracts are exchanged and a time limit is put on the property purchase, usually 28 days, until completion. Somehow this manages chivvy along solicitors so that they can fit what normally takes around three or more months into one! Admittedly, this is probably due to the fact that you can’t be fussy with enquiries or asking for specific terms; the property is simply sold as seen. This can be a big advantage to a buyer if you want to get your next project underway quickly without spending hours pestering agents and solicitors to get on with it!
TYPES OF AUCTION
A traditional auction is a held in an auction house and you can physically attend in person to bid on any of the available lots (properties). The auctioneer steers the bidding along and usually uses some sort of code language to let people know when the reserve price has been met, e.g. “We’re in the room”. Personally, I have never actually set foot into an auction room (although it does sound like a fun experience!). However, I have successfully bought 3 properties through this method (and I’m bidding on another one later this week). I like to make use of proxy bidding (see “How to Avoid Risk”).
An online auction (or a modern method auction) usually allows people to bid as the auction goes along. This could last for days, but the vendor can often stop the auction early if they decide to accept an offer before the end of the allocated auction time. It’s worth having a chat through the process with the agent or auction house that is running the auction if you are thinking of bidding as each of them runs slightly differently.
HOW TO AVOID RISK
Certainty may be one of the biggest advantages of an auction, but it can easily turn into the biggest risk if you miss something when you are preparing to bid. However, there are some key things you can do to reduce your risk. Here are my top tips:
1. View the property
Most properties at auction will allow viewings, whether these are individual or block viewings with lots of interested people at once. ALWAYS view the property. Ideally, get your builder or surveyor to come along to the viewing with you. If you are fairly new to an area or haven’t bought many properties of that particular style before, it is definitely worth considering getting a full homebuyer’s survey on the property before the auction. You just can’t rely on the vendor’s or agent’s word of what the condition of the property is actually like. Vendors don’t have to disclose anything about the property if they are “selling as seen”. Some properties don’t allow viewings and it absolutely baffles me how they ever end up selling. If you (or someone you trust like your surveyor or builder) hasn’t actually been inside the property, how will know that there isn’t a giant crack indicating subsidence or foundation issues? It’s just not worth the risk when a successful bid will legally tie you into the purchase regardless of any issues inside or out.
2. Get your solicitor to review the legal pack
If you’ve ever looked through a legal pack, you’ll know that they aren’t written in simple language. Lease documents and title deeds can be an absolute minefield of legal jargon and if you don’t know what you are looking for then you could miss something crucial. What if there’s an access route straight through the garden? Or the lease is due to expire in a few short years and you haven’t spotted it? Chances are you would be in for some hefty legal fees which you won’t have budgeted for when deciding on your bid. My advice is to always get your solicitor to look over the legal pack for you. I still do this, even though I have seen absolutely loads of these documents over the past 5 years. They may well charge you a few hundred pounds for the pleasure, but it will undoubtedly save you in the long run. I pay this as an upfront cost before I know if my bid will be successful. So, in order to offset the cost for properties where I am unsuccessful, I reduce the limit of my bids at auction to mean that if I do win, that property has a higher return-on-investment (ROI) than my standard BTL purchases.
3. Double check the fees
Once the legal pack has been released, call the auction house and run through all of the fees with them for this specific property. What is the buyer’s fee? Is there an administration fee on top of the buyer’s fee? Are there any compensation payments to the vendor (e.g. repaying them for their solicitors, admin or auction costs)? Are there any other fees besides the ones you’ve just asked about? Honestly, each auction house is different in the way they structure their fees and each vendor can ask for something different in the legal pack, so it is worth double checking. Your solicitor should also highlight all the fees payable when they run through the legal pack for you. Make sure you include them all when you are working out your maximum bid!
4. Be prepared to buy in cash
Auctions have very strict, usually tight, timescales for getting from a successful bid to a purchase completion. Whereas mortgages have a habit of dragging on far longer than the quoted 4 to 6 week turnaround. Personally, I find trying to combine a fast-paced auction purchase with a glacial mortgage completion far too stressful. The best way to avoid a sticky situation where you don’t have the funds to pay the balance on time, is to plan for a cash purchase. It doesn’t have to be your own cash if you are using investors, but if you have funds ready to go then you will hugely reduce your risk of losing the purchase and a hefty deposit along with it.
5. Control your excitement with a proxy bid
I love the idea of being in an auction room, feeling the buzz of bidding by simply raising my hand and then finally winning the bid. However, there is a big danger with all the excitement that I would be tempted to increase my bid beyond my maximum, just to win. It doesn’t help that I’ve usually spent a good few hundred pounds already on the property through solicitors and potentially a homebuyers survey, so it is all too tempting to throw more money at the property to “make it worthwhile”. Don’t do it. Control yourself!! Don’t forget that it is an auctioneer’s job to create an excited atmosphere and get the maximum possible price for the property. Save yourself the temptation, by removing yourself from the room and placing a proxy bid instead. A proxy bid is where you tell the auction house your maximum bid before the auction starts. The auction house then bids on your behalf in minimum increments until your maximum bid is reached. If the bidding continues going higher, they stop bidding for you. If the bidding stops before your maximum, then you will win wherever the bidding stops. Plus, there’s even the added benefit that you don’t have to travel to the auction and spend your whole day listening to all the other lots being sold, so you can bid from anywhere in the world! Another step towards building a business that fits around your lifestyle.
I hope this brief introduction to auctions has made them slightly less intimidating. They really can provide fantastic opportunities, so don’t let them put you off. If you have any questions about my experiences at auction, please do get in touch and I’ll do my best to help you become an auction pro!