When buying at a property auction, you’ll see a lot written about the importance of understanding how an auction works.
You need to understand the legalities, set yourself a budget, check the small print and arrange viewings. However, that’s only a small part of it.
It’s much more important to understand exactly what you’re buying, how you are going to fund it and what your end game is.
You might be buying at a property auction with the intention of living in it. You may also be a property investor planning to sell it at a profit or rent it out. The fact remains, many people contact us after the hammer has fallen, having not really thought through the entire process.
This guide should highlight some of the key points to consider when buying property at auction so you don’t find yourself in a loss-making situation.
If you prefer, watch this video summary
The property you want to buy
Firstly, let’s remember why properties are often put into a property auction. Sometimes, it’s because a quick sale is required. But often, it’s because the property is only suitable for a cash buyer – because it is not currently mortgageable.
Therefore, a golden rule for buying property at auction, is to assume the property is not mortgageable – unless you have satisfied yourself otherwise. That doesn’t mean you can’t borrow money to buy it, but it’s more likely to involve bridging finance and higher costs.
Look out for the following:
Look for cracks, settlement, or subsidence. Make sure you also look out for anything which looks unusual. If some work has been carried out on the property and stopped, maybe that’s because they found something they didn’t want to deal with. Maybe a part of the garden has been cut back or screened off. Is that because there’s something growing there that you should know about? Such as Japanese knotweed? If parts of the property are inaccessible, what are they trying to hide?
A survey is a good idea, but an experienced builder or property investor may be able to help you spot and assess these risks before you attend the auction.
Do you understand enough about the construction? In some parts of the country there are constructions which have been used in the past and are now considered to either be unsuitable for a mortgage or may only be acceptable by a small number of lenders. This means you could end up paying far more on your mortgage than you thought or not being able to re-mortgage it at all. If the construction has a specific name – google it or talk to your broker.
Check out the legislation before buying property at auction
It’s relatively cheap to get a land registry search done (£3). This will show charges registered against the property which may give insights into why it is being sold. There may be other notices registered which may require further investigation. These can be covenants, rights of way etc.
If the property is leasehold, check out the length of any remaining leases. Remember, all lenders will have a minimum term which is required to be left on any lease. It is for them to consider lending against it. To access most mainstream lenders they will want to see 85 years unexpired lease at the start of the mortgage. Or 45 to 50 years unexpired at the end of the mortgage term.
There are lenders which will accept less but that’s likely to mean paying higher rates. Don’t find this out after the fall of the hammer. Find out the information first and talk to a specialist broker.
Check out this link to the government land registry website
Often the condition of the property will be well below your requirements in order to either let, or re-sell the property. Therefore, some form of refurbishment is normally involved. Make sure you understand the cost of these refurbishments and how you will raise the money.
Many people rely on bridging loans to purchase and refurbish properties because they can’t get a mortgage in the current condition. Whilst there are some great bridging products available (leading up to 85% of the purchase price), make sure you understand how bridging finance works. Also, how the fees and interest are normally deducted from the gross loan. This can leave you less in hand than you first thought was available.
Often, the attraction of bridging finance is the seemingly ease with which the loan can be taken out and then repaid. This happens once the property has been refurbished and re-mortgaged or sold. However, this comes at a price with potentially valuation fees, lender fees and legal fees. That’s why a specialist broker is a vital ally. They must be experts in bridging, mortgages, second charges and more to be able to look at all the options for you.
Check out the following videos on bridging below. Remember, in an auction scenario whilst rate and fees are important, certainty of getting the job done in time is probably more important.
We are not advocating bridging finance as the “be all and end all” of purchasing properties at auction. In fact, for the professional property investor, I would explore leveraging equity out of their main residence or other investment property owned. This could be done via a re-mortgage or secured loan. They usually come at lower rates to reduce the amount required on bridging finance.
If there is equity in other property owned by the borrower, a flexible overdraft facility might be a cheaper alternative. Borrowers can apply for a facility secured on their home or a buy to let property and draw down the cash when it’s required. Then pay it back once the property has been refurbished and sold or it has been re-mortgaged. The beauty of this approach, is that you can reuse the facility over and over again. The cost of arranging it and the interest rates charged are normally far lower than bridging and you only pay interest on the money that you are using at any time.
Check out this video for more information on how a secured overdraft loan might work for you.
Simple rule; Talk to a specialist broker about all the options you might have to fund your plans.
Some regular mortgage brokers can have tunnel vision about a re-mortgage being the best solution. Especially, if they seldom deal with the other specialist products. Talk to a broker who covers all the bases such as bridging, second charge loans, commercial mortgages and a whole market approach to residential and buy to let mortgages
Paying deposits and time to pay
It’s normal that you’ll be required to pay a 10% deposit on the day and fund the rest of the purchase within 28 days of the hammer dropping. This can vary from 14 days to 6 weeks so make sure to check.
Bridging loans can be completed in 28 days. However, any unforeseen legal complications can throw these timescales out of the window. Your broker will need to ensure you choose a lender which can most easily accommodate your timescales at the competitive rates you seek. With bridging, in some cases valuations can be avoided. In some cases, lenders offer you dual legal representation which can speed up completion. Some lenders look great on paper but are slow in practice. You won’t know that until you are well into the process and running out of time.
Speak to your broker before the auction and about alternatives to bridging. And if bridging is a requirement, which lender best suits your requirements. Plan well ahead of even looking at properties to buy.
If you are buying property as an investment, you need to consider the tax implications and whether you should buy the property as an individual or within a Limited Company. This is often called a special purposes vehicle (SPV).
You need personal tax advice on this as your circumstances and future plans will dictate the best way of doing. It is recommended that you speak to a property tax specialist unless you are confident that your accountant is fully up to speed on this specialist area. If you get this wrong it can be very costly to change.
What’s the longer term plan?
Assuming you’ve purchased a property, got your numbers right and refurbished the property, it’s likely that you’re either going to re-mortgage or sell it. This is particularly the case for investment property.
Selling at a profit should be fairly straightforward. With that being said, if you are thinking of re-mortgaging the property to either live in or as a buy to let investment, you should be thinking about how you do this before you go to the auction room. This is particularly important if you’re using bridging finance at any point. A mortgage broker will help you plan the whole process all the way through. They should also challenge your numbers to make sure you get them right. You don’t want to sign up to a bridging loan and find you can’t get out of it without high costs or erosion of profits.
You may be thinking of buying the property, giving it a few coats of paint and then re-mortgaging it based on a higher value than you paid for it. If you’re planning on doing this within six months of purchase, it is likely most lenders will make the assumption that the property is worth the same amount you paid for it. This can affect the amount you can raise on your re-mortgage. This in turn could leave you with reduced funds to repay a bridge, repay a family member or just less cash for your next project.
If you’ve carried out significant improvements (new kitchen, bathroom, rewire etc) and can justify the increase in value that makes life easier. However, discuss this with your broker before you buy.
Golden rule here: the closer you go to the established lending limits, the less choice you will have and the more you might have to pay. Your broker will know where the limits are.
Be prepared; have a clear plan; remove emotion
It’s very easy to get swept away in the whole event of an auction so be crystal clear on what you are doing.
What are you buying and why?
In the short term, what do you intend to do with the property?
Have you set yourself an ultimate goal?
What are the costs involved of reaching that goal?
Things that could go wrong – what is the cost of fixing them?
Have you minimised your risk?
Are your assumptions realistic?
Have you spoken to a professional broker and allowed them to challenge your assumptions?
Did you do the research on the value of similar properties in the area? – arrange viewings and ask lots of question
Have you read a copy of the auction particulars and requested a separate legal pack (often included)
Has your solicitor read through it and checked for any hidden covenants or loopholes?
Have you decided how you will own the property and considered tax implications?
Have you decided on your maximum bid – and resolved to stick to it?
Are you prepared to move quickly if your bid is successful?
Don’t get carried away
You should already know the cost of financing the purchase and how you are going to do it. Also, you should know the cost of any refurbishments and how they will be funded.
You should know how you will achieve your end goal of owning the property (potentially with a mortgage) or selling it at a profit.
Work out your numbers and set your budget. Don’t allow the excitement to take you beyond that budget. By all means, if there is an emotional connection or this is your home of a lifetime, you may be prepared to pay a little bit more to secure the purchase. Decide that before the auction. However, if you are buying as an investment, those considerations should not apply. Don’t get carried away!
Check the auctioneer’s small print
Particularly look for clauses which require you to pay fees. Very often there is a buyer’s premium which you have to pay on top of the purchase price. Make sure you know what this is so you can factor it into your overall costs.
Don’t be influenced by the guide price
Auctioneers set a guide price with the main aim of generating interest from potential bidders. The guide price is usually quite low and there is an expectation for the property to sell for more than the guide price.
Understand the reserve
You should also be aware that in many cases there will be a reserve price. This is a price given to the auctioneer by the vendor which the property must achieve to be sold. It is very unlikely that you will know what this figure is and you could easily be bidding against the vendor until the reserve price is reached. There is no victory in bidding against yourself any paying over the odds. Set your limit and stick to it.
Buying after the auction
Properties failing to reach the reserve price is quite common. Just because the property hasn’t sold under the hammer, doesn’t mean that you can’t buy it. When a property fails to reach the reserve price it can serve as a wake up call for the vendor. This causes them to realise they thought the property is worth more than everybody else. This is your opportunity to approach the auctioneers and try to negotiate a sale after the auction is concluded. You may be prepared to go a little higher but the vendor should be prepared to accept less. The auctioneer may not always announce that the property was not sold and may even call out a fictitious name as the winning bidder. Don’t be afraid to ask.
There are profits to be made buying property at auction
Just be careful that those profits are not being made by someone else at your expense.
Promise Money is a broker not a lender. Therefore we offer lenders representing the whole of market for mortgages, secured loans, bridging finance, commercial mortgages and development finance. These loans are secured on property and subject to the borrowers status.
More than 50% of borrowers receive offers better than our representative examples
The %APR rate you will be offered is dependent on your personal circumstances.
Mortgages and Remortgages
Borrow £270,000 over 300 months at 7.1% APRC representative at a fixed rate of 4.79% for 60 months at £1,539.39 per month and thereafter 240 instalments of £2050.55 at 8.49% or the lender’s current variable rate at the time. The total charge for credit is £317,807.66 which includes £2,500 advice / processing fees and £125 application fee. Total repayable £587,807.66
Secured / Second Charge Loans
Borrow £62,000 over 180 months at 9.9% APRC representative at a fixed rate of 7.85% for 60 months at £622.09 per month and thereafter 120 instalments of £667.54 at 9.49% or the lender’s current variable rate at the time. The total charge for credit is £55,730.20 which includes £2,660 advice / processing fees and £125 application fee. Total repayable £117,730.20
Annual Interest Rate (fixed) is 49.7% p.a. with a Representative 49.7% APR, based on borrowing £5,000 and repaying this over 36 monthly repayments. Monthly repayment is £243.57 with a total amount repayable of £8,768.52 which includes the total interest repayable of £3,768.52.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Promise Money is a trading style of Promise Solutions Ltd – Company number 04822774Promise Solutions, Fullard House, Neachells Lane, Wolverhampton, WV11 3QG
Authorised and regulated by the Financial Conduct Authority – Number 681423The Financial Conduct Authority does not regulate some forms of commercial / buy-to-let mortgages
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