Despite the current worries in the property market, auction property sales seem to be booming as never before. Obviously in the present climate, sellers often prefer the speed of auction selling and the prospect of making a decisive sale.
For buyers too, purchasing property at auction has many advantages over the traditional method.
However there are also a number of pitfalls to look out for. If you are really going to benefit fully from your auction buying experience, you need to be aware of the possible risks and be able to avoid them. Here are some examples.
When you go to an auction for the first time, you will find the majority of potential buyers there are experienced property investors or developers. Don’t even think of trying to buy a property until you have attended a few auctions and learnt the ropes.
Guard against getting carried away if you have fallen in love with a property. You must decide in advance what your upper limit is and make sure you stick to it. If you like the property, others may like it too and there could be a bidding war.
Whatever you do, if you hope to bid on a property, make sure you have your finances in place before you come to the auction. Remember that once the hammer has fallen the sale is legally binding and you have to pay 10 per cent there and then – credit cards are NOT usually accepted! Then you must come up with the balance within 28 days.
One major risk involved in buying property at auction is that you may not have been able to inspect the property, or only looked at it quickly. It could have major downsides which you’re not aware of. You must make every effort to find out as much as possible about the property before you bid – remember you can’t get out of the sale once you have won the bid, so it’s “buyer beware”.
Another problem that can arise is getting hold of finance. It’s not true that lenders won’t lend on auction property, but many lenders will insist on a survey. This puts you in a dilemma as if you don’t win the auction, you have wasted the money on the survey. Some lenders will agree a loan “in principle” and do the survey after you have won the bid, especially if you are an experienced property investor. Or you can consider getting a bridging loan. However, don’t forget you run major risks by not having a survey done before committing yourself to the purchase. There could be unseen problems with the property which would make the lenders refuse to lend on it, and/or would render it unsaleable. For instance you could find it had been built on a former coalmine! So safety is often the best policy.
Don’t forget you have to pay stamp duty, auction fees etc. as well as the agreed purchase price of the property.
If you are still asking the question – Why buy an auction property? remember that many people find buying at auction the most enjoyable and satisfying way to buy property. There is a right way and a wrong way to approach buying property at auction – if you remember to avoid these pitfalls, you will be doing it the right way and you will have a positive experience.
E Berry May 2008
Please note that the FSA do not regulate commercial loans or commercial mortgages