It's one of life's truisms that one person's misfortune can be another's opportunity. This is most stark in the not-so merry-go-round of the UK property market.
Repossessions are up 23 per cent year on year, according to the Financial Services Authority (FSA) – although this has tailed off a little of late due to the Government coaxing lenders into taking a more sympathetic view of arrears. But, nevertheless, the property auction rooms are as busy as at anytime since the recession of the early 1990s. Overall, the FSA said, nearly 16,000 properties were sold by lenders – mostly at auction – in the second quarter of 2009, more than double the figure for the same period last year.
Such an abundance of property at auction can present an opportunity to snap up a bargain – for those fortunate enough to have the wherewithal, or the high credit rating to get the right mortgage deal. Prices at auction, although rising of late, are still anywhere from 10 to 40 per cent below the rest of the market. And, money aside, buying a repossession also means you are not dealing with complicated chains, an issue that has become more difficult in the wake of the recession. David Hollingworth from mortgage broker London & Country, says: "It will help achieve a speedy purchase without the potential threat of collapse in a chain that other transactions could face."
But there are many dangers involved with buying a repossessed property too, so the message is proceed with caution. First-time buyers eager to snap up a deal should take particular care.
Where do you find a repossessed property? Once a lender has taken possession, an asset manager is appointed to ensure it is ready to sell. The lender will then decide whether to sell at auction, or through an estate agent. This is based on several factors, including the value of the property, how quickly it is likely to sell, and the size of the lender. Larger lenders are more likely to choose an appropriate option for individual properties, while smaller lenders may stick with one option for all the homes they repossess.
Lenders insist they are mindful of the needs of the borrower both in terms of obtaining the best price and in securing as quick a sale as possible. "It's only once the property has been sold that the mortgage balance can be repaid, so an auction may be a better option even if it achieves a lower price," says Bernard Clarke, from the Council of Mortgage Lenders.
Estate agents are unlikely to advertise repossessed property, so get in touch and ask them what they have on their books. Otherwise, websites such as Property Earth (propertyearth.net) and White Hot Property (whitehot property.co.uk) advertise chain-free properties, including repossessions. Many lenders hoping for a quick sale will list repossessed properties at auction houses. Property magazines and newspapers list upcoming auctions, and you can search for the sales on websites such as Propertyauctions.com. Auction catalogues will then provide basic details about the property. There will also typically be a legal pack, provided by the auction house which includes title deeds, leasehold documents and property searches.
Buying at auction can offer a great chance for a bargain. But be warned that many repossessions are seriously neglected and in need of a lot of work, which could cause difficulties when it comes to raising a mortgage.
"Lenders will sometimes put a retention on funds if there is major work required, until the repairs are complete," says Mr Hollingworth. "Unless the buyer has additional capital to complete the repairs this could mean they cannot raise enough to complete the purchase."
If you have any builder friends, ask them to come along to any viewing. Arrange a full structural survey, as more often than not there are imperfections. Factor in the cost of repairs and note that fixtures and fittings may be missing. You may also have to fork out for services such as water, gas, telephone and electricity to be reconnected.
More importantly, you'll need to have your finances in place before auction day. With such a tight timeframe, there is a real risk that finance could fall through after auction day, and you'll lose your deposit. Arrange an agreement in principle with your lender. A 10 per cent deposit is expected on the day, with the remaining 90 per cent required within 28 days.
Lending criteria remain tight, so expect to put down a 25 per cent deposit for the better deals. Mortgages above 90 per cent loan to value (LTV) are still hard to obtain and expensive. And remember that, at auction, you could end up paying legal and valuation fees of around £1,000, with no guarantee that you'll get the property.
If you're buying at auction, neither party can back out once the gavel goes down. If you buy a repossessed property through an estate agent, it's more complex. A "notice of offer" is placed in the newspaper to announce that an offer has been made and accepted. Other bidders are then invited to view the property for a period of seven days and can offer a better deal. Remember, as the property is owned by the lender, price is their only interest, and if someone makes a counter offer, lenders are likely to grab it. As with an auction you have 28 days in which to complete the sale, so you could see money spent on surveys and solicitors go down the drain at any point up until that deadline.
"You are more likely to be gazumped in a repossession situation," says Angela Brown, solicitor and partner at sas daniels. "If a higher offer comes in before an exchange of contracts they will be under a legal obligation to take the highest offer."
Another tricky pitfall is that there are limits on how much you can find out about the property upfront; information is often beyond reach as the previous homeowner has long gone. "You have to take it warts and all," says Mrs Brown.
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