This article has been updated for 2017.
Buying property at auction can be a daunting prospect, but if you’re aware of the risks and you approach the process carefully, an auction can provide the opportunity to expand your rental portfolio in a remarkably cost-effective way.
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Although recent political events have been causing some uncertainty in the property market, property auctions are reporting healthy sales figures. Stats show that in May 2017, over 75 per cent of properties that came to auction were successfully sold.
If you’re keen to build a buy-to-let property portfolio or you’re looking to expand your existing portfolio, you may be considering buying a property at an auction. It’s not surprising that auctions are popular with property traders and investors, as it’s possible to snap up a bargain, and the buying process is much quicker.
However, there are some risks associated with buying a property at an auction, and it’s important to do a lot of groundwork before you reach the auction house.
What are the benefits of buying a property at auction?
The most obvious benefit associated with auctions is the significant potential reduction in price, with properties selling for up to 30 per cent less than those sold in the usual way.
Part of the reason for this is that many of the properties sold at auction have been repossessed by a mortgage lender, require significant renovation, and/or are difficult to value because they’re unusual.
Many buyers are also attracted by the potential for making a purchase without having to deal with an estate agent. While agents can provide a valuable service for both buyers and sellers, many professional landlords prefer not to deal with them – either for reasons of cost or simply in order to make the process as quick and as simple as possible.
Once you make a successful bid for a property and the auctioneer’s gavel falls, you’ve entered a legally binding contract - effectively you’ve exchanged contracts, a stage that can take months to reach in a normal house purchase process. At this point, you have to pay a 10 per cent deposit and sign the paperwork.
What are the risks of buying a property at auction?
While there are significant advantages associated with auction purchases and it can be a speedy and cost-effective way to expand your property portfolio, there are also some major risks.
The first and most important of these is that auctions tend to encourage people to rush into decisions that they would not otherwise take. It is remarkably common for people to buy properties at auction without even having seen them. For most people this should be a huge no-no; instead you should ensure that you commission surveyors’ inspections and valuations as you would with any other purchase.
But you must also remember that there is, of course, no guarantee that you will win the auction. The second significant risk is therefore that you will spend money on surveys and spend time securing a mortgage, only to find that you are outbid. It’s quite common for auction houses to set low guide prices to encourage interest, so you may find that your apparent ‘bargain property’ actually sells for 50% more than the guide price.
Top tips for property auction success
1. Go to property auctions just to watch
The auction process can be overwhelming and difficult to understand to begin with. To get the hang of it, go to a couple of auctions just to watch. This will help you understand how the process works, and will help ensure you can concentrate on the important bits when you eventually come to bid. It will also give you an idea of how much properties tend to sell for compared to their guide price.
2. Always view the property before bidding
Before the auction, request a catalogue to see what will be up for sale. If you see something that interests you, arrange a viewing. Remember that it’s also sensible to get a surveyor to inspect the property. Don’t be tempted into buying a property ‘sight unseen’ as this could bring huge problems in the future.
3. Seek advice from the experts
Buying at auction shouldn’t mean going it alone. As well as commissioning a surveyor, get a property lawyer to look over the legal pack for the property you’re interested in. Its contents could have significant implications, and it’s important that you fully understand them.
4. Get your finance in place
When you win an auction you will be required to put down a 10 per cent deposit immediately. Normally, you will then be expected to settle the remaining amount within 28 days. It is therefore imperative that you have the relevant finance in place before bidding.
If you need a mortgage, you’ll usually need to get your Mortgage in Principle sorted and the lender will need to conduct a valuation before the day of the auction. Even if you don’t win the bid, it’s likely you’ll still need to pay a fee for these services.
5. Stay calm on the day
Finally, remember that the auction can be an exciting, stressful environment, and it is one that is specifically designed to make people spend as much money as possible. Make sure that you set yourself an upper limit, and that you stick to it. It is often best to be accompanied by a trusted person with no financial interest in the deal, who will be able to help you keep calm.