Buying at Auction
- 23rd Oct 2019
- Article written by
There are a number of auctioneers in the South East selling a variety of residential and commercial properties. Buying at auction can be a successful way to avoid the potentially lengthy and uncertain conveyancing process. However, there are a number of risks that must be considered prior to bidding on a lot.
Buying a property at auction can be a straightforward process but it is vital that all due diligence, searches, investigations and surveys are carried out before you start bidding on the auction day. If you are successful at the auction, you will be contractually committing to purchase the property, and a 10% deposit will be payable to the auctioneer immediately. If you fail to complete the purchase on the set completion date, you will be breach of the auction contract, which will have costly consequences.
Therefore, we strongly recommend carrying out the following before bidding on a property at auction:
Have a mortgage / finance in place
Generally, if you are the successful bidder, you will exchange contracts and a 10% deposit will be payable to the auctioneers immediately. The completion date will then be set for 28 days after the auction (although the timeframe may be shorted / lengthened if the seller has decided to vary the conditions of sale beforehand). This is a relatively tight period of time for a mortgage lender to consider the mortgage application, arrange for a valuer to inspect and value the property, issue the mortgage offer and then for your conveyancer to “draw down” the mortgage. Therefore, unless the mortgage application is begun before the auction, we would have doubts on whether a 28 day completion could be met. If funds aren’t available on the day of completion, you will be in breach of the auction contract and may lose the 10% deposit paid and be liable for other claims by the Seller if you are still unable to complete within 10 working days of the Seller’s Solicitor issuing a Notice to Complete. The Seller will then be able to terminate the Contract – keep the deposit – and will be free to resell the property.
Instruct a solicitor
The Seller’s Solicitor will provide the auctioneer with title documentation, protocol conveyancing forms (such as property information form / fittings and contents form), searches, special conditions of sale and the draft form of Transfer Deed prior to the date of the auction. It is vital that the legal pack is reviewed by a solicitor prior to the auction to ensure there are no legal issues with the property that you intend to purchase. There will be no form of recourse on the Seller if it transpires there are any legal issues with the property following completion of the purchase.
The Solicitor will look for any issues that will affect the saleability and mortgageability of the property such as restrictive covenants burdening the land, absence of easements (such as rights of way), breaches of planning permission or building regulation consent and any issues which may arise from the local authority, environmental and water and drainage searches. Purchasers must be careful not to purchase the property – spend a lot of money renovating and refurbishing it – and are then unable to mortgage or sell it due to a legal issue.
The Seller may also require the Buyer to reimburse them on a number of “disbursements” (such as search or land registry fees) and this information is often hidden in the special conditions of sale. Without these being reviewed beforehand, you may be surprised to learn that additional funds are payable to the Seller on completion. In fact, we have previously seen a provision in the special conditions requiring the buyer to pay an additional sum of £5,000 which was a “contribution towards the Seller’s fees and expenses”. Our client was informed of this, prior to the auction, and this didn’t come as a shock when it was added to the completion monies, on completion. However, this could be a real issue for a purchaser if they were unaware.
A solicitor will charge for time spent on reviewing the legal documentation but this will be money well spent in the event a legal issue is highlighted beforehand.
Carry out a survey
A survey isn’t compulsory but this is certainly something we would recommend having done prior to committing to purchase a property at auction. This will provide you with an analysis of the condition of the property and will highlight any defects such as structural problems (subsidence, damp and timber defects) as well as any other issues internally or externally. Again, we stress that – once the hammer goes down – you are legally committed to purchase the property and there will be no opportunity to withdraw from the purchase (or make a future claim against the Seller) in the event there are any issues with the condition of the property. The auction conditions usually make it clear that the purchaser has had the opportunity to inspect and survey the property before the date of the auction and by bidding on the property it is assumed that the purchaser is fully aware of any potential issues. Therefore, you will be expected to have carried out all surveys and diligence beforehand.
You must also bear in mind that - if the Property seems a bargain - there is probably a reason. A structural survey will at least provide you with the comfort that there are no physical defects before committing to purchase the Property.
In light of the above, we believe that purchasing an auction can be a good way to purchase quickly and efficiently without any conveyancing delays. However, the key is in the preparation and the implications of failing to prepare could be extremely damaging.