Buying at auction: a way to a bargain or a moneypit?
The catalogues are awash with properties, but it still pays for buyers to be on their guard.
Sunday 14 June 2009
Auction rooms have traditionally been the crucible of the British property market. It's where repossessed properties are sold at a knock-down price, and where cash-rich buyers look to snap up a bargain. And, at the moment, they are busy places.
A by-product of the recession has been the soaring number of repossessions, with 12,800 recorded in the first quarter of this year, compared with just 8,500 in the first quarter of 2008, according to the Council of Mortgage Lenders. Many of these repossessed properties will end up with the auction-houses, listed by lenders hoping for a quick sale. We know supply is plentiful out there – but what about demand?
Interestingly, the total number of lots, both residential and commercial, sold in April this year at auction property company the Essential Information Group (EIG), rose by 13 per cent in comparison with figures for April 2008. EIG also saw the number of repossessions coming to auction accelerate from less than 200 a quarter offered on average in 2004, to 2,665 in the fourth quarter of 2008. Similarly, Savills' last residential auction in May outperformed previous auctions this year – with 88 per cent of the lots selling, at a total value of £15.7m.
However, buyers hoping to snap up the best auction bargains may find that prices are still beyond them. "Auction prices will not now get any lower, and, in fact, some lots seriously outperformed expectations. Our view is that we are at the bottom," says Paul Mooney, director of Savills Auctions.
Despite this, opportunities remain for big savings at auction. Many sellers will be looking to shift their homes quickly, so properties can often go under the hammer for far less than they would if going through an estate agent. It can also be a fairly speedy process, with the sale sealed on the day and no long, complicated chains which can fall through at the last minute. "The first thing to note is that every seller at auction is motivated to sell. Also, the properties tend to be unmodernised and in need of some work so it allows the buyers to put their stamp on them and make some money," says David Sandeman, founder of EIG.
However, buying a property at auction can be a more complex procedure than expected. A great deal of groundwork has to be laid before auction day and anyone unprepared could quickly become unstuck. "Auctions are sometimes seen by first-time buyers as a chance to get a bargain, but if you've got no experience it can be risky. There are a lot of hoops to jump through with any house purchase and doubly so for anyone who has never bought at auction before," says David Hollingworth from mortgage broker London & Country.
One of the biggest drawbacks to buying at auction is that the timeframe is extremely tight and a great deal has to be organised. Once auction dates have been put in the diary, potential bidders should get a copy of the the auction catalogue and start scanning for suitable properties. They can then get in touch with the auction house to arrange a viewing of the properties they like the look of. It's also useful to chat to local estate agents for more information on the surrounding area, and to take a look at other house prices for similar properties.
The auction house is duty bound to make available the properties' title deeds and you would be best advised to get a solicitor to read these through before putting in a bid. The auction house's sales information should also highlight any other conditions to the sale, for example, some vendors may require an earlier completion date.
This can be time consuming and expensive if a solicitor is involved, and may prove fruitless if the bid is unsuccessful. When buying through an estate agent, costs are only incurred after an offer is accepted.
Buyers also need to organise any financing for the sale prior to auction day. "Auction houses are buzzing as potential buyers look to pick up a property bargain, but if you are keen to buy at auction you must get your finance approved, in principle at least, beforehand," says Mr Hollingworth.
Lending criteria is still tight and if you intend to let the property out you will be expected to have a deposit of at least 25 per cent, with the lender providing the rest. In addition, lenders are taking far more care over which buy-to-let investments they lend against. They want the figures to stack up. The mortgage must be covered by the likely rental income, with room to spare. Expect lenders to insist on likely rental income equal to 125 per cent or more of the monthly mortgage costs.
Those hoping to become owner-occupiers through the auction route may be able to obtain a higher loan-to-value mortgage, but this depends very much on their personal circumstances – a good credit history and a well-paid, secure job. But remember, the higher the LTV, the greater the rate of interest charged. What's more, mortgages above the 90 per cent LTV are thin on the ground, hard to obtain and expensive at present.
Obtaining the finance to buy a property at auction should pose no more problems than if buying a home through an estate agent but added difficulties can arise when valuing the property. A chartered surveyor can carry out a homebuyers' report and provide details on the condition and value of the property. "It is worth having a survey done before you bid at auction to ensure there are no hidden nasties which will put the lender off. Many people don't bother with this because there is no guarantee they will successfully bid for the property but this could be an expensive mistake," says Melanie Bien from mortgage broker Savills Private Finance. However, discrepancies between the lender's valuation and the price paid on the day are common, so bidders must be confident that they can cover any shortfall. The temptation to overbid could leave some bidders in a dire situation if they are unable to borrow any more money.
Even on the day of the auction, the property details can change, so it is vital to ask if an "addendum sheet" has been issued which contains last-minute amendments or additional information relating to the lots. It will be presumed that all bidders are aware of any changes made, so check this meticulously.
Once a sale has been secured, yet more work must be done and again, timing can be an issue. A deposit of 10 per cent of the purchase price must be put down on the day of the auction, after which winning bidders have only a short time to complete the sale, or they risk losing their deposit. A good mortgage broker could prove invaluable in chasing up lenders and ensuring funding is in place before the deadline. "Once the hammer falls, you're legally committed to that purchase and completion is likely to be expected within 28 days," says Mr Hollingworth.
Above all, bidders should take care not to get carried away. Auctions can be intimidating but bidders must set a maximum bid beforehand and keep that figure in mind. It's a good idea, Savills says, to attend a few auctions before taking the plunge, to get used to the often frenzied atmosphere.
Tips for buying at auction
Plan your purchase and don't get carried away
Find an auction: Ask to be put on to auction-house mailing lists for upcoming auction dates. Also, subscribe to an auction website such as eigroup.co.uk.
Get some experience: Anyone nervous about bidding should attend at least one auction as an observer first.
Do your research: Approach estate agents before bidding to find out what similar properties in the area have gone for. Get a survey done.
Get your finances in order: Secure a mortgage offer first; make sure the lender can complete your application within three weeks of the sale.
Factor in extra costs: Don't forget stamp duty and auctioneer fees of up to 1.5 per cent of the sale price.
Last-minute checks: On auction day, call ahead to check the addendum sheet for last-minute changes or additions.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
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