If you’re a buy-to-let investor looking to land a bargain on your next property or buy quickly, auctions could be a great option. Especially under the latest economic climate of high inflation and a cost-of-living crisis, budgets all-round are being squeezed, so many property investors and landlords turn to auctions to try and save on their next purchase. In this blog post, we will discuss what a property auction is, how it works and how to land a winning bid, and the pros and cons of buying a house at auction.
How a house auction works
An auction house or estate agency will normally arrange and manage a property auction. A few weeks in advance, marketing material and information packs are released to give potential buyers a chance to research and view the properties. At this stage, a guide price is also revealed to let buyers know the estimated worth before the auction date and allow time for buyers to prepare their bids.
The seller of an auction property will set a reserve price, which is the lowest bid they are willing to accept. However, this information is typically confidential. The highest offer over the reserve price is the winning bid, at which point the buyer is required to pay a deposit or reservation fee. The buyer must then complete the purchase within a given timeframe.
Types of house auctions
There are two types of property auctions – traditional and modern.
Traditional house auctions
Also known as unconditional auctions, a traditional auction is normally held at an auction house with all buyers in one place openly placing bids. The highest bidder exchanges contracts on the day of the auction and pays a 10% deposit, and the remainder of the cost must be paid within the following 28 days. If the buyer withdraws or fails to make the 90% payment, the deposit and opportunity to buy the property are lost.
Due to the short timeframe, traditional auctions tend to be more suitable for cash buyers and investors.
Modern house auctions
Also known as conditional auctions, modern house auctions are held online and run for 30 days. During this timeframe, prospective buyers can place bids at any time. The winning bidder pays a 5% reservation fee, after which they have 56 days to complete the purchase. This includes a 10% deposit to be paid within the first 28 days and a further 28 days to pay the remainder.
Unlike traditional auctions, modern auctions give buyers more time and flexibility with payments, making it easier to buy with a mortgage. Modern auctions can also be more accessible and easier to participate in as they are held online.
How to prepare for a house auction
If you’re considering buying your next investment property at auction, here are a few tips to think about before getting started:
· Research
Know what you’re buying. Whether it’s a traditional or modern auction, there will be information available for buyers to do their research, so it’s useful to find out as much as you can about the property and arrange a viewing before the auction date. You can also look into the local property market to gauge if it’s a worthwhile investment.
· Keep an open mind
It can be beneficial to keep an eye on the guide price in the run-up to the auction date (if it’s a traditional auction). If the price goes up, it could mean there’s a lot of interest in that property and you may have some competition. The guide price is also typically lower than the realistic selling price to entice potential buyers, so it’s good to keep an open mind throughout the process in case you’re unable to buy the property you’d like.
If you haven’t been to a house auction before, you could attend one or two before you’re ready to buy and familiarise yourself with the process and what to expect. This can be online or in person. The experience will help build your confidence with auctions, the language used by auctioneers and bidders, and how bidding works.
· Check the small print
Legal documents will be available for all properties, including relevant information like title deeds and searches. A solicitor can help with checking the legal pack for small print or any issues that could affect your bargain.
· Be financially ready
If you need a mortgage for your next property, a mortgage in principle can offer significant leverage over other buyers. It’s also good to check that the property you’re considering is eligible for a mortgage as some lenders may not offer mortgages for certain property conditions.
It’s also important to remember that, as soon as you win a bid, you’re required to pay 5% (if a modern auction) or 10% (if a traditional auction) of the purchase price, so be prepared for the upfront costs. Next, you’ll have 28-56 days to complete the purchase, the funds for which should also be ready to avoid the risk of losing the deposit and incurring any further fees.
Auction day
Below are a few tips for auction day, being prepared, and sticking to your plan:
· Be prepared
If you’re planning to bid, you’ll need some paperwork if you make a purchase. At traditional auctions, you’ll need proof of ID and proof of address. For modern auctions, these documents may be required before you can make a bid. If you’re a cash buyer, you may also be asked to prove your affordability of the deposit, and if you need a mortgage, you may need to present your agreement in principle.
· Stick to your budget
It can be easy to stray from your bidding plan, so it’s good to set goals and limits beforehand. Establish your affordability, maximum budget, and any available buffer as going over these limits could reduce your bargain.
· Don’t be disheartened
Any investment can be an emotional process, so don’t be disheartened if you don’t land the bid you want. Why not sign up to mailing lists and be notified when new properties are up for auction? That way you can stay on top of emerging opportunities.
How much does it cost to buy a house at auction?
There are a few costs to be aware of when buying a house at auction. If you’re the winning bidder, as well as the deposit, you may need to cover an auction house administration fee, which can either be a fixed amount or a percentage of the property sale price. The admin fee should be detailed in the property pack before auction.
If you’d like a solicitor to look over the legal documents for a property before auction, this is another cost to factor in. If you win a property, you will also need to find a solicitor or conveyancer to oversee the legal process and transfer ownership.
Other costs to think about are stamp duty, which depends on the property value, and building insurance, which is required once you sign the contract and the property becomes your responsibility.
Pros and cons of buying a house at auction
Particularly for bargain-hunting landlords, house auctions can be a great way to save money on your next property, but there are some potential cons to be aware of if you’re considering buying at auction.
| Pros | Cons |
| A great opportunity to find a bargain | It can be competitive, and you could miss out on a property you like due to higher bids |
| A transparent bidding process | Payment is required quickly |
| A quick way to buy a property without major delays that other sales methods can have | It’s not very flexible. If you change your mind after winning a bid, you could lose a lot of money |
| You can buy at auction with a mortgage | It can be difficult to secure a mortgage for an auction property |
How to find a property auction
A good place to start is narrowing down the area that you’re interested in and getting in touch with estate agents or auction houses in that area. You can subscribe to notifications when a property that matches your criteria becomes available, and ask for information packs on any houses that you want to know more about.
You can also find upcoming property auctions on UK Auctions List, where you can register for access to full property details and virtual tours, auctioneers’ details, and property alerts.
Alternative ways to invest in residential property
For those who already have a property portfolio and are looking to diversify, or for those who would not be keen to purchase at auctions, there are alternative ways to invest in and benefit from residential projects. At Propiteer Capital, we offer investments that include residential developments in popular locations and transcient cities, providing purpose-built quality living units in the UK and Ireland. We also provide access to these investment opportunities via the Propiteer Capital Property Bond. If you would like to find out more about our residential properites that could help diversify your portfolio, click the link above.
Summary
Buying a house at auction can pose some risks such as losing a bid or losing your deposit if you change your mind or can’t complete the payment, but it can also be a great way to find a low-value home if you’re prepared and have done your research. Whilst it can be competitive, it’s also a fast and transparent way to buy a property.
Whether you’re looking for a bargain on your next property or a renovation project to build up value, do your homework on the auction house or agency, the local property market and average house prices, and make sure you have sufficient funds and you could be well set to find a hidden gem at a property auction.
Recommended Read: Is a Garden Important in a Buy-to-Let Property?