Auction Property – Would you buy a home under the hammer?  How to invest in property at auction – or even get on the housing ladder

You may think auction houses are more for selling antique furniture and art, but they have also become a popular route for investors, buy-to-let landlords and even some homeowners looking for auction property.

A high number of buyers are turning to property auctions and their fast moving world, where you get locked into a purchase of an auction property within minutes of making the winning bid.  You need to be brave though, as you could potentially enter into bidding war to secure your ideal property.

So, is it worth buying a property at auction?

It can be difficult to pick up a bargain in the conventional way due to high property prices and increased demand.  Homes on the market are being snapped up quickly and there is always a risk of the purchase falling through, meaning you would then have to spend time looking for another perfect property.

Traditionally, the most popular way to buy or sell a property has been to go through an estate agent, or more recently people have tended to search online through Rightmove and Zoopla.

Nevertheless, if you are prepared to learn the ropes, use your common sense and stick to your price limit, an auction property may be worth looking into to secure your dream home or invest in your buy-to-let portfolio.

It can also be beneficial for sellers as estate agents fees tend to be much higher and if there are a lot of bidders then you may also secure a higher price.

So, what happens at a property auction and how can you buy and sell a home under the hammer?

What types of properties are for sale?

Many people assume auction properties are mostly derelict abandoned buildings that can’t be sold any other way.  However, properties can be put up for auction for a number of reasons.  For example, some might want to avoid estate agent fees, or feel they may get a better price under the hammer.

There are also other people and organisations, for instance, long-term investors, institutional investors and public sector bodies who just want a quick sale.

Auctioneer fees are usually no more than 2 per cent plus VAT and can sometimes be lower.  Once the hammer falls the sale is guaranteed.  Due to competitive bidding, the property may achieve a much higher price than if sold through an agent.  The seller agrees a reserve price with the auctioneer, which prevents them from selling it too cheaply.

There are a wide range of properties sold at auction, from residential flats and houses to commercial plots, mixed use developments, land and garages.

Who buys there?

Buy-to-let landlords can pick up a decent deal at an auction, which can help build their portfolio.  They have also been popular with professional investors and small developers looking for value for money.

Sometimes first-time buyers also use them as another route to finding a home, or those hoping to upgrade or move up the ladder.  The main problem with this is that once the hammer falls you have committed to buy and with contracts being exchanged that day, you only have a very short timescale.  If you’re relying on the sale of your existing home then you must have found a buyer, or have the additional finance lined up before you go to auction.

Potential bidders will be able to view properties ahead of the auction at organised open days to assess whether it is the right home or investment for them. This is to ensure anybody that wants to gets an opportunity to see what they are buying before putting in a bid.

Another benefit of buying at auction is that it’s a much faster process. Once you’ve won the auction there is no waiting around for negotiations on offers which can sometimes be a lengthy process.

This also means there is no chance of gazumping, where someone puts in a higher offer after yours has been accepted, or gazundering, where a buyer changes their offer at the last minute.

Once the hammer falls, the deal is done.

How can people bid for a property?

The four ways of bidding at auction are:

People can attend an auction in person and place bids themselves.

By proxy where they authorise the auctioneer to act on their behalf, and they tell them beforehand the maximum they want to pay.

By liaising on the phone with the auctioneer as the bidding takes place, this brings them closer to the action than bidding by proxy and they can increase their bid as they wish.

They can also bid in an online auction.

Being in the room is beneficial as you can often assess the mood and judge other bidders’ body language better.

The auctioneer will start the bidding at the sellers agreed price and will then look around the room for people wishing to bid.  The price will start to rise by the thousands which will eliminate the less serious buyers and once it gets really competitive, there may only be a few left and so the price may rise by just £100 or less.

Once a final bid is made, the hammer will fall and the sale and purchase is complete. Once the auction has ended, the winning bidder must pay a deposit there and then to confirm the purchase.

How does the bid winner finance the purchase?

Bidders have the option to pay by cash or arrange finance from a mortgage or bridging lender.

Although most lenders will provide mortgages on homes bought at auction, the process can be more complex than a standard purchase as the final price is not set until later.  It is worth speaking to a mortgage broker to find out the best way to apply for a mortgage.

Bridging finance can be a good option if it is only for a short period as it can provide quick access to a loan, but it can be expensive and if you can’t pay it back or obtain a standard mortgage to clear it, it could end up causing you problems.

Due to the short window of time, it is wise to have a loan or mortgage agreed before the auction and an application in progress, or you could risk losing the deposit if you are rejected.

Post courtesy of This is Money.