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5 things you should know before buying property at auction

Auction Key

Property has proved a sound investment opportunity for many years now, and with property prices only set to rise, surely 2015 is the time to focus on increasing your property portfolio. Whether you are a small scale investor looking for a buy-to-let opportunity or large scale investor looking to buy multiple properties, investing in this market is likely to be a very smart move.

Since the economic downturn in the UK in 2007, an excess of repossessed properties have been brought to market, and often these chain-free properties are sold through auction houses. Because these sellers are keen to complete a quick sale, it is no secret that there are bargains to be had at property auctions. Moreover, the speed at which these sales complete is very appealing to an investor as well, as there is no need to wait around for 3 months for contracts to exchange; when that hammer is struck, the property is SOLD.

However, it is worth remembering that not every property sold an auction is a viable investment opportunity. Indeed, some of the ‘properties’ up for sale at auction are more half-way-house than ideal home. Navigating the property auction market can seem a bit of minefield, so it is important to make sure you are fully prepared for making a purchase in this type of environment.

With that in mind, here’s 5 things you need to know before you consider purchasing a property at auction. Being clued up prior to purchase will ensure your future investments are as safe as houses…

  1. Buyers must have their finances in place

One of the most important rules to remember is that buyers must be able to pay a 10 percent deposit on any property they purchase on the day of the auction. Some auction houses will accept cheques, but some will not, so investors must be aware of the individual rules before attending an auction.

Moreover, the buyer is not usually allowed more than a further twenty days to provide the remaining 90 percent of the funds. As such, it is important to be sure that funds are accessible, and that withdrawing them from other financial or investment products is not going to incur fees. Failing to meet this deadline would result in the loss of the deposit.

  1. Guide prices are set intentionally low

It’s hard not to be enticed by a property auction because the guide prices placed on properties often seem very competitive. Industry professionals have acknowledged that the guide prices on auction properties are often set lower than market value in order to encourage new buyers to try this method of buying.

Encouraging new buyers to this industry is not necessarily a bad thing, but it could become dangerous if potential buyers become dazed by the low guide price at the expense of sensible decision making. For example, if you are suddenly confronted with a three bed semi in the South East of England, on at a guide price of only 100K, you may feel there is no need to carry out proper research on the property or set a bidding limit in your mind before the auction – because surely any sale around the guide price will be a good deal… As such, unrealistically low guide prices can cause bemusement and poor decision making in the auction room.

However, as long as investors have researched the market value of an auction property, and they are aware that guide prices are often set very modestly, then the low guide price need not confuse matters on the day of the sale.

  1. Some properties never make it to auction

Although auctioneers won’t be quick to admit this, it’s true that sometimes a sale can be negotiated prior to auction. When a buyer first expresses interest in a property, it is possible to enquire whether the sellers would be open to negotiations. If you are very keen on an auction property and you don’t wish to fight it out in the auction room, then this could be a good opportunity.

In the same breath, it is worth telephoning the auction house a day before the auction to check that the property you are interested in is still available, and hasn’t been sold to someone else prior to auction. Indeed, frustration can occur when, after making an effort to view a property and possibly engage the services of a solicitor, you may find out that the sale has been negotiated by someone else prior to the auction house.

If a property does not meet its reserve price at auction, it may also be possible to negotiate a sale with the seller after the auction has finished.

  1. It is always necessary for the buyer to do their research

All of the points thus far have been leading to this crucial point – investors must do their research before bidding on a property at auction.

Not only should you view the property, but you should also look at other similar properties in the area to see what they are selling for. Don’t be scared to visit a few local estate agents and see how their properties compare to the one you are interested in buying at auction. It is also crucial to read through the legal aspects of your role as a buyer in an auction, which will be provided to you in a ‘legal pack’ once you have shown interest in a property.  Different auction houses have different selling rules and procedures and so it is crucial to be aware of these before raising your hand to bid.

  1. Buyers should not underestimate the challenges of the auction environment

Bidding in an auction for the first time can be an emotional experience. As such, it is important to remain calm, and self-assured in this busy selling environment. Because of the speed of an auction, new buyers are often very keen to not let a sale pass them by. However, as a rule of thumb, if you are not able to think clearly, and you feel your decision is being rushed, then you should not raise your hand to bid. Whilst traditional property buyers may find themselves being ‘gazumped’ behind their backs, auction buyers see their rivals up close and personal, and each higher bid can put pressure on novice buyers to stand their ground, even when doing so would make no financial sense.

To ensure you are as stoical as possible on sale day, you should always attend a few ‘practice auctions’ if possible, or at least watch a few videos of property auctions online, so you can appreciate the kind of atmosphere you will be stepping in to.

 

So, whilst there are risks involved in buying a property at auction, most of these risks can by managed by ensuring that the necessary leg-work is carried out prior to auction. Most importantly, by cutting out the estate agent, auction sales can provide you with the keys to your new property in a matter of days, not months. This means that there will be no delay on receiving a return on your investment.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Bella Palmer

The author Bella Palmer

Passionate about the Investment Market. I am also a keen Investor myself. Love to travel and dance.