In recent years purchasing a property at auction has soared in popularity, particularly among investors. Laura Hallett Lea, property litigation solicitor at Harrison Drury, offers eight top tips on how to make a successful purchase.
One of the main reasons for the surge in investment is that you can purchase a real bargain, and be ready to rent the property upon completion of the sale. But any potential investors should proceed with extreme caution.
Any savvy investor will know that being forewarned is being forearmed. You need to carry out your research before you attend an auction – as the potential investment may not be as valuable as you first thought. Sometimes speed isn’t the only reason a property has been put into auction.
1. Be prepared
Carry out the required due diligence; visit the property and where possible, obtain the opinions of experts. We recommend that a surveyor is instructed (even just for preliminary advice) and a local estate agent is employed to assess the rental value of the property and establish if it would do well within the rental market.
2. Do your research
Research the area you are looking to buy a property in. Bear in mind that social factors, particularly crime, can have a significant impact on any investment property’s rental potential
3. Take legal advice
You should instruct a solicitor to read and interpret the auction pack. Paying for this up front advice is considerably less costly that purchasing a property with legal issues. It’s important to ascertain if there are any legal restrictions, for example, a restrictive covenant preventing the property being let out, or a leasehold with only a short period of time remaining on the lease.
It is also important to look at how you wish to finance the property. Most auction properties, require cash investors, with a 10 per cent deposit being payable on the day of the auction. Most are not mortgageable, but where they are, you need to have a mortgage decision in principle, approved in advance.
There may also be condition issues affecting the property which will need rectifying if you want to sell the property on the open market in the future.
4. Understand the quoted guide price
Usually this is an indication of the reserve price for the property as opposed to an indication of what the property is likely to sell for. It’s advisable to look online at prices that similar properties in the area have sold for. This will give you a good indication of the property’s potential value.
Set yourself a limit and stick to it. Bids can escalate quickly, particularly when amateur investors and homebuyers are involved in the bidding.
5. Shop around
Ideally, you will spend time, and possibly money, looking at other properties at the auction. It’s likely that you will only secure one property at the auction, so it makes sense to consider your options thoroughly.
6. Secure a bargain
With a smaller market of bidders meaning less competition than in the open market, and possibly only cash buyers, the likelihood that you will secure a property is fairly high.
7. Quicker completion
A deposit of 10 per cent, plus occasional costs, has to be paid on the day so make sure you have ID and the funds to pay. Completion normally takes place within a few weeks thereafter.
8. Buyer beware
It’s crucial that you’re aware that once the hammer has fallen on a successful bid, you have committed to buy the property, regardless of its condition. The onus is on the buyer to ensure they have properly considered any issues before placing a bid.
With that in mind, we would strongly recommend that the legal pack is read prior to the auction, and advice is taken before making any commitment to purchase the property.