We've received a lot of enquiries recently from clients about buying properties from auction. We're asked questions about the auction process itself, but also about how to arrange finance for auction purchases.
A common myth about property auctions is that they're only for cash buyers. This is not the case! It is absolutely possible to find loans for properties you want to buy at auction. The process is very simple, very quick, and costs nothing.
In this article, we'll explain how a typical property auction works, and how you can quickly and easily line up finance in advance. This allows you to bid on properties in the auction, safe in the knowledge that when the hammer falls and yours is the winning bid, the finance will be there to complete your purchase.
Property auctions have become more mainstream
Many people are becoming attracted to the idea of buying a property at auction. We’ve all watched Homes Under the Hammer and other TV shows where budding property developers spot an opportunity to grab themselves a bargain.
One of the main attractions of buying property is speed:
Sales are completed very quickly.
Once the hammer falls, contracts are exchanged immediately.
The purchase usually completes within 28 days.
No chains, no gazumping, no stress-inducing sealed bids or “best and final offers”.
All kinds of properties are available at auction, from houses and flats, investment or buy-to-let properties, HMOs (houses in multiple occupation), refurbishment or conversion projects. Retail, commercial and mixed-use properties are also available to buy at auction, and we expect to see even more of this, as town centres struggle to recover from the pandemic and property owners look to offload properties and downsize their commercial property portfolios.
The property auction process
We're going to assume that you know which auctions are local or relevant to you. They're still mostly online, but over the next few months, we'll see a gradual transition back to traditional live auctions.
Most towns, cities and counties will usually have at least a few auctions every month, so spend some time online and take a look at what properties are available. You can usually see details of previous auctions, so you can easily get a sense of what properties sold, and at what price.
1. Identify properties you are interested in
You can search online for properties that are coming up for sale at auction, or you can approach the auction houses directly and look at their catalogues. Most auction houses allow you to sign up to receive their regular mailings, so you'll always know when a new auction is happening near you.
2. Work out what you can afford
Some auction buyers have the means to buy auction properties with cash. Most, however, do not. As with any other property purchase, you need to do some calculations and work out how much you're willing to pay, to make the project viable. You'll then need to make sure you have a deposit ready. For most auctions, this is 10% of the hammer price, and you'll need to pay it as soon as the auction ends.
3. Get your finances in order (Part 1)
If you're intending to bid at the auction, and you need finance to complete the purchase, then it's vital to sort this out before auction day. In most cases, it can even be done the day before the auction if necessary, but it needs to be done.
If yours is the winning bid, then you're legally obliged to pay the full purchase price within 28 days. If you don't, you'll forfeit the 10% deposit you paid on auction day. We'll discuss auction finance in more detail in our next article, but rest assured – it's quick, easy and costs you nothing to get an indicative loan offer from specialist lenders before the auction.
Clear Idea can help you with this, and it's usually possible to get an indicative loan offer from a specialist lender within 24 hours, and often within a few hours.
4. Do your research!
Before you commit any of your hard-earned cash to an auction purchase, it's vital that you do some basic due diligence on the property or properties you're interested in. Sometimes, there will be open days or other viewings when you can visit properties. The
auction website will also provide details of which firm of solicitors is acting for that property, and will usually have an information pack available to send to interested buyers.
You also need to look at the guide price provided by the auction house, and compare this to what you think the property is actually worth. This is as much an art as science. If you're planning a refurbishment or conversion project, then you'll need estimates from estate agents as to what the eventual market value might be.
You may be able to buy a property for £100,000, spend £30,000 to refurbish it, and sell it for £150,000, after all your costs. In which case, congratulations – you're now officially a property developer! On the other hand, you might under-estimate the refurb costs, over-estimate the eventual market value of the completed property, and struggle to recoup all your costs. All you'll have for your trouble are some sleepless nights and a few (more) grey hairs.
Property development has the potential for huge profits, but it's not without risk. It's certainly not for the faint-hearted…
5. Take legal advice
Local searches, environmental searches, planning searches, flood searches and land registry searches are just some of the checks that need to be carried out by a conveyancing solicitor. The last thing you want is any nasty surprises, such as finding out your dream property is a health hazard or is at risk of subsidence or flooding. If there are any potential problems, it's vital to identify them sooner rather than later.
6. Consider getting a survey
This is not mandatory, but it may be a good idea, depending on the property and any work you're planning to carry out. This way, you can ensure you know about any defects and any maintenance or repairs that are likely to be needed.
7. Prepare your documents for auction day
You'll usually need to bring two forms of ID to the auction – a driving licence and passport are ideal. You will also need evidence that you can afford to pay the 10% deposit.
8. The auction
Remember the calculations you carried out earlier about what you can realistically afford. Don't get carried away by bidding fever – if the bidding goes too high, you need to withdraw gracefully.
If you were successful at the auction, then congratulations! You'll need to pay the 10% deposit immediately, and this is non-refundable. The remaining 90% of the purchase price is then likely to be payable within 28 days.
10. Get your finances in order (Part 2)
Assuming you've lined up finance before the auction, then you need to move quite quickly to ensure you can get everything done within the (usually) 28-day completion period.
Just email or call Clear Idea to tell us you won the auction, and we'll get to work. That's assuming you've used us, of course. If not, what were you thinking?!
There will be the usual documents and information to gather together, and we'll deal with the lender to make sure they have everything they need.
We'll talk more about the details of auction finance in our next article, and in particular how bridging loans (the usual type of finance used for auction purchases) are structured, and what they typically cost. (Plot spoiler: they cost more than traditional mortgage loans, but they're not eye-watering.)
Property auctions – the final word
Property auctions don't need to be intimidating, you don't need to be an experienced property guru, and you don't need to be a cash buyer.
You just need to be careful, organised and have a basic understanding of how the process works.
For most property investors looking to buy at auction, arranging finance is a key part of the process, but again, this is a straightforward process and doesn't take long.
Speak to Clear Idea today about how we can help arrange finance for your auction purchases.
Good luck and happy bidding!