Auctions have become ever more popular, largely due to the speed and efficiency for all parties and also the net gains that can be made by prospective purchasers. But whether you are purchasing or selling at a property auction, it is imperative you understand how the process works and that you are alert to the risks. Auctions are sometimes known as the ‘deadline’ method of sale. This is because once the auction is completed, the property is sold and legal ownership is transferred to the buyer. This method bypasses the most common way of selling properties, which usually requires the appointment of a firm of solicitors who engage in the conveyancing process. Although this method takes longer, the purchaser is more protected because of the due diligence of the solicitor involved. At an auction, the burden of investigating a property’s suitability falls solely on the prospective buyer.
It is important that as a potential purchaser you fully research the property. The last thing you would want to do is invest your money in a property that is legally defective! With leasehold properties, you must be particularly cautious as there are often more complex problems involved such as missing freeholders, unbilled service charges for major works which may consist of repairs to communal areas, or disputes over billed service charges.
Ensure that you obtain the auction pack as early as possible as this contains various legal documents relating to the property. We recommend that you seek legal advice in relation to the contents of the pack, as the legal terminology often leaves prospective purchasers confused. It is advisable to view the property and obtain a survey to ensure you are fully satisfied as to its state and condition. Remember that there is always a reason why the property is being sold at an auction, so your investigative work will confirm whether there are any deficiencies in the property. Occasionally, there are sinister reasons such as boundary disputes which prevent the property being sold on the open market. In our opinion, it is also in your best interests to research similar properties in the local area so you have a good estimation of how much it is worth. This way you can also set yourself a maximum threshold, so when it comes to the auction you do not pay over the odds. Not all auctions provide bargains!
In our professional opinion, the most important step you can take prior to participating in an auction is to organise your finances. Whether you require a mortgage or not it is crucial that your finances are arranged. Typically, you are required to produce a 10% deposit on the day of the auction, and the remaining 90% is required within 28 days thereafter, although this may vary depending on the seller. When you arrive at the auction, ensure that you have the 10% deposit ready, together with your identification. If you cannot produce the remaining 90% within this timeframe your deposit will be lost and you will be left with nothing. Navinder Singh, one of our most experienced solicitor states that:
“It is surprisingly not unusual for buyers at auctions to not fully think through their financing position, whether it be through cash funds, bridging companies or mortgage lenders. I recently had a client who failed to agree a mortgage on his auction property and unfortunately the client lost his deposit, in the region of £15,000.”
It is important to note that obtaining a mortgage for a property at auction differs to conventional purchases, as you are obtaining the mortgage after the exchange of contracts. The lender will require that a solicitor is appointed to act on their behalf in checking that the security is adequate for lending purposes. If there are any defects, the lender will not be willing to lend. You will therefore not be able to complete in time. To avoid this particular problem we recommend that you have cash resources in place.
In summary, auction properties can be very lucrative. However, there are many serious pitfalls associated with them. When moving forward with any auction property, ensure you take the relevant legal advice and be clear on your methods of financing.