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Buying property at auction

INVESTMENT GUIDE: Auctions offer a chance to buy property cheaply, but you must do your homework beforehand
May 23, 2008

Auction catalogues should be compulsory reading for depressed first-time buyers trying to jump on to the property ladder. Open one and you'll find page after glossy page filled with unbelievable bargains: flats for sale at £25,000, three-bedroom period houses for less than £100,000, a high-street bank for £80,000. Can it be possible?

Sadly, almost certainly not. Most auction guide prices are set on the low side to tempt in potential buyers, with the result that the final price is often significantly higher than the guide price. Even so, for buyers looking for a residential bargain or a chance to enter the world of commercial property, the auction room probably offers the best hope of doing exactly that.

Guide prices

Guide prices are, in many cases, an indication of the minimum amount a seller is prepared to accept and, if no one else is interested, you could walk away with that hoped-for bargain. Often, there is nothing wrong with the properties being sold. Sellers are attracted to auctions for a number of reasons, including the speed and certainty of the sale (the buyer can't pull out later), the fact that an ugly property (say, a flat above a kebab shop) stands a far better chance of being sold in an auction than it does in an estate agent's window or because a large amount of renovations are required. Sometimes, because there is a complicating factor, for example that the covenant attached to a parade of shops prohibits the landlord from letting to certain types of retailers. Whatever the reason, it's worth considering if the 'defect' will have an impact on future rental income or resale value. In many cases, it won't, but it could affect your chances of getting a mortgage on the property.

Competition

Property auctions for both residential property and commercial premises have become increasingly popular. More estate agents now sell through auctions as well as traditional channels (see list below) and some property investors only buy through auctions because of the opportunity to pick up a bargain and because they make the purchase of buying a property much quicker. From start to finish, the whole process can take just over a month, compared with an average of three months when buying through an estate agent.

Auctions are competitive environments and properties are heavily marketed to potential buyers – if you spotted a steal in your catalogue, the chances are plenty of other people did too. That will push the price up on the day and the investor with the deepest pockets, or who can manage on the thinnest of margins, will win. If you've never been to an auction, set your limit before the bidding begins and stick to it. If someone else is prepared to spend an extra £20,000 on a property that you liked, it doesn't mean it's good value.

As an investor, you have to keep an eye on the bottom line at all times so, if you're investing in commercial property, every single extra pound you borrow means a smaller or even negative net yield. Can you afford that? If yours is the winning bid, you are legally obliged to complete the sale.

Your maximum price

You can work out what your maximum price is by focusing on the rental yield. If it's a commercial property with a tenant, the rental income will be fixed. Work out your mortgage costs for a variety of prices (going upwards from the guide price) and deduct these from the annual income. If the property is residential, you will need to have an idea of what renovations and refurbishments will cost and what similar-sized properties in the area rent for. Most estate agents will be able to give you a specific answer to this.

A second point to note is that, although bidding at an auction can be done without you having to spend any money whatsoever, if you are serious about buying you should pay for a survey and legal advice in advance of the auction. You also face mortgage arrangement fees. Even on a small flat, these bills could add up to £1,000 and there is no guarantee that you will walk away with the property at the end of the day.

What happens at an auction?

Weeks before the auction, anyone who has registered an interest with the auctioneers will receive the catalogue, which contains details and photos of the properties for sale, the guide price, the conditions of sale, information on the location, information about the tenants or a description of the interior and so on. If something catches your eye, you can request the legal pack. It's worth using a lawyer to examine the paperwork – they can advise you if vital documents are missing (for example, the evidence that planning permission was granted) and explain what the legalese means in plain English.

Make sure you or your lawyer read all the relevant documents beforehand – you might need to be persistent in chasing them up because it’s not unknown for another bidder to keep hold of some key papers to kill off a rival's interest.

Inspections

At this pre-auction stage, you will also be allowed to view or inspect properties and arrange for surveys to be carried out. Some auctioneers and sellers will supply a survey and other basic information, so that potential buyers do not have to spend money unnecessarily. But the seller's survey is unlikely to satisfy your mortgage lender, nor will you be able to complain afterwards that the seller's survey failed to highlight a particular problem. The rule that applies to every property auction is: buyer beware.

You should also arrange a mortgage, but be realistic about the sum of money you need – the guide price is probably too low. The mortgage lender will make you an offer, but funds will only be released to you once the lender is satisfied with all the paperwork after you've completed on the purchase.

Small print

Check the small print for things such as stamp duty (payable unless the property is of a very low value or in a designated disadvantaged area), any liability for VAT and buyer's or purchaser's premium – this is where you pay an additional percentage of the final price to the seller.

Properties can be withdrawn right up to the day of the sale – it's worth phoning the auctioneers before you set out on a long journey to avoid discovering that the property you intended to bid for has been pulled from the sale.

The auction itself can last several hours, so if you don't want to stand for the duration, get there early. You can, of course, bid by telephone instead of attending in person. If you do this, you will usually need to send the auctioneer a blank cheque for the deposit ahead of the auction in case you are successful.

It's probably worth attending at least one auction simply to watch what happens and to talk to other buyers about their tips for winning a bid and their reasons for buying particular properties.

During the auction, you cannot ask questions.

Once the gavel falls, you'll be given a contract slip. This should be returned to the runner along with a cheque for, usually, 10 per cent of the deposit (from a UK clearing bank). No cash and no credit cards. Some properties may require a higher deposit. The cheques are cleared the next day so you must have adequate funds in place. The full amount must be paid within 28 days.

The Royal Institution of Chartered Surveyors has produced a guide to auctions, which aims to explain the auction process from a buyer and seller’s point of view, and what you can expect. Visit www.rics.org.uk or telephone 0870 333 1600.

SELLING AT AUCTION

If you'd like to sell a property at auction, your first step is to discuss the sale with two or three auctioneers. Not every auctioneer will be interested in your property. Find out what they would recommend as the guide and or reserve price, when their next auction is, what marketing they would carry out and, of course, what fees you will be liable to pay if the property sells and if it doesn't.

You should check, too, what would happen in the event that you withdraw the property from sale – if you change your mind about selling or if someone offers you a suitable sum before the auction. The auctioneer will explain what they require of you – to be available for viewings, for example – and they will advise you too about whether they think it would be a good idea to commission a structural survey for interested parties. A HIP – a home information pack – might also be necessary.

Compiling the pack could take several weeks and is expected to cost sellers a minimum of hundreds of pounds (but you may be able to pass this cost on to the buyer). You are responsible for liaising with your solicitor and revealing anything that buyers need to know about (for example, rent arrears, disputes with neighbours and so on).

You do not need to be present on auction day – the auctioneer always signs the contract and takes the deposit, not you – but some sellers like to attend to watch the action.

AUCTION HOUSES

There are well over 200 auctioneers in the UK. You can download a complete list from http://www.rics.org

Here are a few of the largest groups:

• Allsops: 020 7437 6977

• Barnard Marcus: 020 8741 9990

• Cushman & Wakefield Healy & Baker: 020 7935 5000

• Harman Healy: 020 7299 7300

• Jones Lang Lasalle: 020 7493 6040

• Savills: 020 7877 4511

TOP TIPS FROM SAVILLS AUCTIONEER JAMES CANNON:

Buying

1. Draw up a business plan determining your investment requirements and what role property will play in your portfolio.

2. Research the market by obtaining all relevant electronic and paper auction catalogues.

3. Retain a solicitor, surveyor and any other professional you require for your purchases.

4. Visit the properties that interest you to ascertain current and future uses.

5. Inspect the legal pack, check tenants’ covenants and, if required, seek professional advice on the properties that interest you.

6. Ensure your lines of finance are agreed prior to purchase. This will normally involve a valuation. Get ready to pay a 10 per cent deposit in the room.

7. Register your interest with the relevant auctioneer to find out if the property is available for sale prior to auction/ensure the property is not sold prior.

8. Turn up to the auction early to pick up any last-minute changes to the addenda or guide prices.

9. Check results of other lots being offered prior to yours to see how the market is faring.

10. Set yourself a limit for your maximum bid that achieves the criteria in point 1.

Selling

1. Prepare property documents to present to auctioneer.

2. Select auctioneer on the basis of similar product offered, success rate and specialist expertise

3. Ask one or more auctioneers to price your property. Shop around to ascertain the level of service and pricing.

4. Instruct your auctioneer according to results. Agree pricing, fees and costs.

5. Instruct your solicitor to prepare legal documentation and special conditions of sale.

6. Agree a realistic guide price with the auctioneer.

7. Obtain market feedback from the auctioneers and agree realistic reserve price.

8. Be prepared to answer questions raised to your lawyers by potential purchasers. Reduce the risks felt by the buyer and you have a better chance of increasing the price paid.

9. Attend the auction so you can see how it goes.

10. Deal with post-auction queries or bids if the property fails to reach reserve.