Property auctions – love them or hate them? Or, do you not know enough about them?
Most people, particularly inexperienced first-time buyers, steer clear because buying a home at auction can be complicated.
But, this isn’t all there is to it! So, should you take the plunge? Let’s weigh up the risks. Here’s a closer look at a first-time buyer auction.
Why are people hesitant of property auctions?
Auctions are often viewed negatively. What are the reasons for this? Let’s offer some help for first time buyers.
Auctions are seen by most people as a risky way to buy property – best left to professional investors. First-time buyers in particular are wary to enter a bidding war in this scenario.
Or, they’re sometimes viewed solely as a way of selling properties of people who have died.
Lack of knowledge
They’re also a small part of the market. Auctions represent a small percentage of the homes sold each and every year. While they have grown in popularity, this means that many prospective homeowners simply don’t know enough about them.
A complicated process
Bidding for properties can be fast and furious. It requires tenacity, focus, single mindedness, good local knowledge and doing lots of research before the auction. For some, this is more hassle than it’s worth.
When the hammer falls, auctions are also legally binding. This means that if you place a winning bid, you have to complete in 28 days or you lose your deposit.
While this can be a positive for sellers who want a speedy sale, it’s daunting for some buyers.
There are some extra costs associated. For example, auction houses usually charge between £200-£400.
This is on top of the costs already involved with buying a house, such as stamp duty.
Why do people buy at auction?
Despite some downsides, there’s a lot more to property auctions than that. This way of buying a home has risen in popularity in recent years. For example, in 2006 the percentage of properties sold at auction of all residential sales was just 1.5%.
So, what are the reasons behind this?
Can bag a bargain
The purchase price of properties sold at auction is often much lower than market value. So, those attending the auction can bag a bargain.
It can be tough for first-time buyers to save for a deposit and get on the property ladder, so this can be a helping hand. Let’s face it, who doesn’t like to save money?
A quick process
Those looking for a quick sale often head to auctions. This has benefits for both buyers and sellers, as it avoids those long, drawn-out deals.
Avoids some property risks
When buying at auction, there’s no property chain. This means the sale can be much easier to manage, as you don’t have to worry about someone pulling out.
Also, there’s no risk of being gazumped.
Buying at auction – first-time buyer advice
Can a first-time buyer buy at auction? Answer: yes, but it’s not without its risks.
If you think this is the right option for you, it helps to understand the process. We can help you do just that:
People get excited by auction brochures; the properties look super cheap compared to the local market.
But, these are only the ‘offer’ prices at which bidding starts, not the price you pay. Most properties at auction sell for a little under or over the market price, depending on how many people are bidding in the room.
The trick is to find the properties that for various reasons (age, condition, location) aren’t attractive to professional investors and may not be fought so hard over.
Also, bear in mind that some properties will be listed as suitable for ‘cash buyers’ only.
Before taking on an auction, it helps to get to grips with what some of the lingo means!
As well as bidding during a live auction, you’re allowed to put in a bid before it starts and, if the seller agrees, you can buy a home at auction that way instead.
It’s why listings sometimes say a house has been ‘sold prior’.
Putting down a deposit
Most auctions ask for a 10% cash deposit once the hammer has gone down. Therefore, you will need to have the money ready on the day.
Auctioneers ask bidders to prove who they are before bidding kicks off. So, bring along at least two official proofs of identity, such as a passport and a driving licence.
Bidders will also need to line up a solicitor to complete the paperwork to make the purchase legal.
As soon as the hammer comes down, the property is the winning bidder’s responsibility. So, you will need to arrange first-time buyer buildings insurance for the property as soon as possible.
Most property auctions publish ‘legal packs’ for each of the properties being sold. These include key documents such as:
- The title deed
- Any special conditions of sale
- Details of a recent Land Registry enquiry (proving who owns it)
- Local planning searches
- Copies of any leases that may be applicable to the property
- Its Energy Performance Certificate or EPC
Always get a survey
The big difference between buying a home via an estate agent and at an auction is that most people buy properties at auction ‘blind’ without completing a survey.
However, this will likely be a mistake. Properties sold at auction often need some form of refurbishment or renovation doing. House prices can be lower for a reason! Always get a property survey.
Of course, you may lose the money spent if you don’t place the winning bid. But, this is simply one of the risks associated with buying at auction. Plus, if you do place the winning bid, you don’t want to find the property has any nasty surprises when it’s too late.
How to pay for an auction property
As well as putting down a 10% cash deposit, winning bidders at property auctions also have 28 days (normally) to pay the remainder of the auction price.
It’s vital to have a mortgage arrangement set up with a lender so that your finances are in order once the hammer has come down. It might sound obvious – but you should know how much you can afford before you bid. A mortgage in principle will allow you to do this.
This is another risk of using property auctions. If the home someone has bought proves to be worth less than they paid for it when the bank values the property, or it has major structural problems, the mortgage offer could be withdrawn and the buyer is left high and dry.
They would then lose their deposit if a new mortgage deal cannot be found within 28 days, or they may have to take out an expensive bridging loan.
Avoid this by speaking to a mortgage broker beforehand.
What’s the modern method?
An increasing number of auction houses operate the ‘modern method’. This gives bidders a grace period of 28 days to get all their paperwork done before they are required to put down a deposit and make a legal commitment to buy a property.
This gives the buyer a longer period to complete a survey on the property and get their finances sorted out.
Buying at auction online
The digital world is beginning to penetrate the formal and old-fashioned world of auction rooms. A few of the larger national chains now offer online bidding, although it’s still relatively rare.
Buying a house at auction first-time buyer – some handy tips
What are the basics of first-time buyer house auctions? What things you should you know before you bid?
Let’s take a closer look:
- Stick to your budget – don’t get carried away bidding!
- Attend a few property auctions before the real thing
- Always seek legal advice – e.g. have your solicitor go through the paperwork
- Find out as much about the property as possible
- Visit the property more than once
- Research the area thoroughly
The final tip is one of the most important. The location itself will play an enormous role in whether you enjoy living somewhere or not. Gather as much information as possible, from local schools to crime rates. Phil Spencer’s property report can collect everything you need to know in one place. It will arm you with the facts! Get your report below.