How to buy a property at auction?
There are few places as ripe for finding a profitable commercial or residential property bargain than at an auction. Auctions come with a massive list of advantages for property investors, such as the certainty of your purchase(s), the speed with which a purchase is put through, and the relatively straightforward buying process.
Whereas once upon a time most bidders at a property auction might have been regular investors, we now often see first-time buyers and entrepreneurs considering property investment in attendance, hungry to know what the fuss is all about. The excitement of a property auction is palpable, and not just because of the opportunity of picking up a property that will make you a fortune in profit. There is the tension of bidding, the chance of failure or success, and the thrill of going head-to-head with another investor.
But it isn’t all pleasure and excitement: if you aren’t prepared, then there is the very real possibility of overspending, buying a duff property, or feeling like you have rushed into making a decision. So, before catapulting headfirst into a bidding war with the idea that the next cheap bidding lot is going to make you a fortune, check out our top 5 tips for better preparation and smarter tactics to guarantee your success at a property auction.
1. Choose a maximum bid and stick to it
When the adrenaline of a steadily climbing auction bid is gushing through your veins, it can be tempting to go over budget. Another bidder might be competing with you head-to-head, and the desire to challenge and defeat them could be strong, but doing so may cost you in the long run.
Don’t be tempted!
Most properties will sell above their guide price, as this is the minimum that a property is expected to make once the auction is complete. However, the risks of getting sucked into a bidding war are very real, and can be the difference between making thousands on the back of a successful purchase, or persisting with another and spending far more than you had ever intended, sending your profits tumbling into the negative.
Because of these dangers, after you have completed your research into a property and run some simple calculations, choose a maximum budget size for each auction lot and do NOT be tempted to overspend.
Why this puts you at an advantage: Many attendees will not have the foresight to set a maximum bid for each auction lot, and by setting yourself clear boundaries you can ensure that you can afford – and profit from – any purchase you make.
2. Visit a property before bidding
A low auction price may seem like a tempting purchase, but there will almost always be a strong reason for a lot being stamped with a low price-tag. It is common for huge renovations to be required to make a cheap property liveable – often including structural alterations or reinforcements – so visiting a property and getting advice and figures from an expert is vital.
Firstly, going to see a property allows you to get a feel for the area and the kind of buyer or renter who may want to live there. It is frighteningly easy to buy a property and discover that its low price is the result of either a lack of buyer/renter interest, or the deeply undesirable location. Even low-income renters want to feel safe in their beds.
Taking a surveyor or an experienced builder with you to view a potential property gives you a sense of the work required to make a residential or commercial property either rentable or sellable. Many buildings will be in poor condition and require time, attention and hard work, so if you are looking to move in, rent or sell it on quickly, buying from a property auction may be the wrong choice for you. With the help of a builder or surveyor, though, you can compare what is stated in the auction catalogue or online to the reality you find at the property, helping to ensure that what is officially being stated is the case.
If the relevant documents for the property are not readily available to view before the auction takes place, it may be necessary to contact the vendor’s solicitor. Remember that you, as the potential buyer, are expected to have full knowledge of the documentation and the facts, and neither the seller or the auctioneer is responsible for any subsequent issues.
Why this puts you at an advantage: Some people turn up to an auction without prior knowledge of the catalogue, while others put in the minimum amount of research before bidding. Bidding on properties in this manner can turn a well-researched purchase into a roulette spin with tens or hundreds of thousands of pounds at stake.
3. Ensure you have the money
It may seem glaringly obvious, but the speed with which the sale of an auction property needs to be completed can come as a shock to the inexperienced. It is not uncommon for a bidder to find themselves short, or scrabbling to secure funding in time.
As soon as you have successfully bid on and won an auction property, you are legally obliged to pay for it and will have to put 10% of the money down as a deposit. Then, before you have time to catch your breath, in a 14-28 day timeframe you will generally be expected to complete your financing, and if you miss the closing date, you will lose your deposit. Check with the auctioneer about how it can be paid for, and be sure to bring ID on the day.
Remember that a guide price quoted in an auctioneer’s catalogue is only that: a guide. It indicates the lowest expected price it is expected to achieve at auction, and is subject to change any time before auction day.
Why this puts you at an advantage: You are covering yourself against the possibility of wasting your time and energy on a property that you will be unable to pay for in time, as well as ensuring that you don’t lose thousands of pounds you put down as a deposit.
4. Read the legal pack
Don’t get caught out!
Do your homework, put in your due diligence and read up on the in-depth technicalities of a purchase.
Before that hammer drops and there is no going back, familiarise yourself with the facts. A legal pack contains information on the reasons that the property is up for auction, why it may not be available to the general market, including any legal problems affecting the building, any reasons that the property may be uninsurable or un-mortgageable, and more. A legal pack helps you to know what you are buying, and that the reality doesn’t differ from what appears to be a great bargain. It can also reassure you that there are no existing tenants, and that the property limits and size is as you expect it to be.
A legal pack may also let you know whether there is any buyer’s premium to be paid to the auctioneer, as well as any survey fees, conveyancing costs and stamp duty land tax.
Why this puts you at an advantage: Reading a legal pack lets you know exactly what you will be getting yourself into by purchasing the property.
5. Don’t ignore Stamp Duty and VAT
Another way that first-time or lesser-experienced property auction buyers are caught out is by expecting the bid price to be the only payment required.
Be aware of your responsibilities when it comes to Stamp Duty and whether VAT needs to be paid. These can work in your favour, or can add unexpected costs to an auction purchase, so put in your research before committing.
There are some great incentives and tax breaks available when converting commercial property into residential, and it is worth being aware of them. Investigate the flat conversion allowance, as well as whether you can claim VAT back on the conversion costs.
Finding a sale that is structured as a “Transfer of Going Concern” (a property that is being sold with a sitting tenant in place) can help reduce VAT costs, too. As the buyer, you would have to contact HMRC before the date of the transfer, which can be complicated considering you never know at an auction if you are going to be the successful bidder. However, the money this can save you is enormous.
Why this puts you at an advantage: Increasing your awareness of the finer details of auction spending will prepare you – and your bank account – for any purchases you make.
There are distinct advantages and disadvantages, as well as risks and considerations, to investigate before buying a commercial or residential property from an auction.
Before deciding whether to seriously bid on a property, it is essential to put the time in before attending the auction and deciding whether you have the money, whether the property is worth the price, whether you can arrange funding in such a quick turnover time, and whether you can make the profit on the building you are looking for.
As with any kind of property investment, knowledge is power.
If you would like to learn the 44 most closely guarded secrets of property investment, you can find what you are looking for here. Read more about securing below market value properties here.
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