Guide to Buying Property at Auction

Recently with the rise in repossessions and the property market remaining relatively weak, more and more people are turning to auctions as a way of picking up a bargain. This guide will hopefully help you to avoid some of the common pitfalls when buying properties at auction.

Whilst there are bargains to be had, there are also quite a few white elephants and it’s important to exercise caution.

Understand the Property Auction Process

Unlike buying a property on the open market, where once you have made an offer you can carry out searches and make enquiries and inspections before committing to the purchase, once the hammer falls in the auction room the successful bidder will be contractually obliged to complete. You won’t get any say in the drafting of the contract and if you fail to complete for whatever reason (other than if the seller refuses) you will almost certainly lose your deposit, which you will have to pay immediately after the auction.

The date for completion will be set and although it is common for this to be 28 days from the auction this can be any period the seller chooses, so make sure you are aware of the completion date before you bid.

Forewarned is Forearmed

A surprising number of people “buy blind” at an auction. This is very dangerous and usually completely unnecessary. It should be remembered that a common reason for putting a property in auction is because there is some defect, either physical or legal, which would make it difficult to sell on the open market. The seller will hope that someone will come along and buy it without having inspected the property or the legal title and thus take the problem off his hands.

If you are considering bidding for a property at an auction, first of all find an auction you’d like to attend and have a look at the catalogue. You should try to give yourself at least 2 weeks to make your preliminary investigations before going to the auction. Once you’ve found a property that seems suitable ask to view it and ensure that you have a good quality survey. It might be tempting not to bother with this as it might seem like a waste of money, especially if you are not the winning bidder, but it could end up saving you thousands of pounds. Sometimes you won’t be allowed to have a viewing. If this is the case you need to ask yourself what the seller doesn’t want you to see. It might be that there are tenants in the property and the terms of the tenancy agreement do not allow the landlord to show people around. There is nothing to prevent you from just visiting the property and politely asking for a look around, though of course the tenants are entitled to refuse.

Once you are satisfied with the physical condition, you should ask for a copy of the legal pack. This will contain all the title documents, a copy of the conditions that will be attached the contract, the home information pack if applicable and should disclose any title defects (planning enforcement notices, boundary disputes etc) that the seller is aware of. There will usually be a fee payable of perhaps £50 – £100. Again it might be tempting to save some money here but if there is anything wrong with the property which materially affects its value and which is disclosed in the pack, it is unlikely you will be able to escape from the contract or look to the seller for compensation.

You should take the pack to a solicitor and ask him to look at it. Doing the conveyancing yourself is not recommended as you won’t be able to ask any questions of the seller’s solicitor before you commit yourself (and afterwards, if you discover you’ve missed something, it will probably be too late to do anything about it). Your solicitor won’t be able to raise any enquiries but he will be able to point out any problems and advise you what affect they are likely to have. If your solicitor misses something then you’ll at least have the comfort of the firm’s indemnity insurance.

If you are buying a leasehold property (which includes the vast majority of flats) where there is an annual maintenance charge, pay particular attention to what provisions there are in the contract in relation to settling any arrears. Under the Common Auction Conditions of Sale the seller is responsible for any arrears up to the date of completion however a special condition may be added to the contract to override this and place the responsibility on the purchaser. The arrears could run to thousands or in some cases even tens of thousands of pounds.

Buying Before the Property Auction

Sometimes an auctioneer will have a mandate from his client to consider offers made to him in the weeks leading up to the auction. If you see a property in the catalogue you particularly like and you’re worried about being outbid then you should ask if you can make an offer. If you do, you will be expected to exchange contracts immediately, just as if you’d bought it in the auction room, so make sure you have your deposit ready and you check when the completion date will be.. You should still of course carry out all the investigations outlined above.

Buying with a mortgage

As mentioned earlier, the completion date will be fixed and can be as soon as the seller wishes so if you are buying with the aid of a mortgage you need to make sure that you have an offer agreed in principle and you provided and signed all the necessary documents before you go to the auction.Even then there will still be work to be done afterwards, the lender will not be able to issue a mortgage offer until it has carried out its valuation for example. You should only consider properties where the completion date is at least 4 weeks away, otherwise you could end up reaching the date and not having the finance in place, which could lead to the seller rescinding the contract.

Where you need a mortgage it is doubly important to instruct a solicitor beforehand to look at the legal pack. You’ll need a solicitor anyway as the lender will insist on having legal representation (which you will have to pay for) and if there are problems with the title, even if you would be happy to proceed regardless, your solicitor will be under a duty to report the issues to your lender who may withdraw the mortgage offer as a result. The same goes for if their surveyor values the property at less than the purchase price.

Failure to Complete

If you are the successful bidder then you will be contractually bound to complete on the completion date and the seller will be entitled to damages if you do not. On the day of completion you will be obliged to complete, that is get the money to the seller’s solicitor, by the completion time stated in the contract. In the standard conditions that time is 2pm though it may be varied by a special condition. It will rarely be later than 2pm. Once the completion time has passed the seller may serve a “notice to complete” on you or your solicitor. To be valid on that day it must be served no later than 4pm, otherwise it is treated as being served on the next working day.

From service of the notice to complete you will then have 10 working days (or such other period as is specified in the special conditions – this is often reduced to 5 working days) in which to complete. You will be liable to the seller for interest at the “contract rate”.

This should be specified on the face of the contract and is usually 4% above the Bank of England base rate. This accrues daily and is calculated as follows: (((purchase price – deposit already paid) / 100) * (base rate + 4)) / 365

In addition the contract will usually include a clause obliging you to pay the seller’s solicitor’s additional fee for serving the notice, calculating the interest etc. This will typically be £100 – £200 plus VAT.

These amounts will need to be paid before completion can take place. You will also be liable to the seller for any losses suffered as a result of the delay, for example additional mortgage interest, wasted removal costs etc. These amounts may be agreed on or before completion but the seller cannot refuse to complete if they have not been paid – he will need to sue you for them after. If you are threatened with this you should immediately take legal advice.

If the notice to complete expires then the seller has the option to rescind the contract (i.e. bring it to an end). He does not have to rescind immediately and if he chooses to delay he still retains his right to rescind at any time. Until he does, interest will continue to accrue and you will continue to be liable for his losses. If he does rescind, he will be entitled to keep your deposit (incidentally, regardless of the amount of deposit actually paid, you will be liable for 10% of the purchase price, though in an auction you will usually have paid the full 10% in any case) and sell the property again. If the eventual sale price of the property is less than the price you had contracted to pay the seller will be entitled to sue you for the difference, as well as additional costs of sale such as legal fees and estate agent fees, together with any number of other losses, for example if the seller was in a chain then all the other buyers’ and sellers’ losses will ultimately fall on you. If you are sued successfully then, assuming the seller’s claim is greater than £5,000, you will also be liable for his legal costs.

Clearly the damages could run to many thousands of pounds and if you were still thinking about not obtaining the legal pack or surveying the property beforehand, hopefully reading this section will have made you think twice.

Escaping From the Contract Following the Auction

If you do end up in a situation where the property is not what you thought and you want to break the contract without suffering all the losses outlined above then, although in most cases you will find there is nothing you can do, you need to speak to a solicitor who practices litigation immediately. If you have previously instructed a volume conveyancer it is unlikely the fee earner dealing with your matter will have the experience in litigation, which is quite separate from conveyancing, to assist you.

A seller’s solicitor needs to be careful when drafting the contract conditions and preparing the legal pack to ensure that any defects or problems are properly disclosed and that no false or misleading information is given. If the seller fails to disclose something which he is aware of and which had you been aware of you might not have purchased, then the contract may be invalid. For example if there is a dispute with a neighbour the local authority has threatened to take enforcement action for a planning breach (but it has not registered a local land charge) then these things should be disclosed in the legal pack. If they are disclosed and the reason you didn’t know about them was because you didn’t read the pack then you won’t have any defence.

Conclusion

I hope this guide hasn’t put you off auctions completely as they can be a great place to pick up a bargain. You must just ensure that you are well prepared and well informed about property that you want to bid for.


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12 Responses to “Guide to Buying Property at Auction”

  1. Sharon - Guaranteed Home Sale Says:

    Interesting article – thanks for sharing.

  2. Be careful, is a house a bargain now?

  3. One thing I notice a lot when people purchase tenanted commercial properties at auction is that since the ruling in Newham Borough Council v Thomas-Van Staden [2008] EWCA Civ 1414 people are buying properties which they believe are outside of the provisions of the Landlord & Tenant Act 1954, but are acutally protected. If properties have been bought with bank finance, this would be a breach of their covenants, and they would be in trouble!

  4. […] This post was mentioned on Twitter by Paul Sailes, Sharon Crossland . Sharon Crossland said: RT @hipconsultant: Guide to Buying Properties at Auction | Property Auctions http://bit.ly/9B247a […]

  5. A fantastic article tha certainly answered a few questions for me.

    Many thanks

    Sharon

  6. It is alsoimportant to express to your property lawyers from the outset if you have any special circumstancesor any deadlines, which you would like them to aim towards as it is a good way to ensure that things to not take too long. However, if you do not choose a reliable and experiences property lawyers then you may come unstuck later on in the transaction. For example, some property solicitors mat not communicate enough with their clients and poor communication can lead to confusion and unwanted stress.

  7. Hugh MciIwraith Says:

    what happens if the seller fais to complete?!! As the buyer and successful bidder at auction, I have paid the 10% deposit 28 days later when trying to complete the sale, the seller coud not produce a form 12A as there was an inhibition against him. He should not have been seling the property! Now the deposit (that was handed to his silicitor) has disappeared and nearly 2 months down the line I still do not have the property. I have paid the auctioneers fees, my solicitors fees and the 10% deposit!

  8. A fantastic article that certainly answered a few questions for me.

  9. I just wanted to add my recent experience of what happens when properties go to auction.

    I recently had a flat purchased on my block where the new owner immediately altered the layout (against the terms of rhe lease) and marketed it for rent as a 2- bed property when in fact it was a one-bed.

    I notified the letting agent that the freehold company required the property to be returned to its original layout and marketed correctly.

    A 2-bed flat under Local Housing Allowance rates in my borough sets a weekly rental of £207.69 but a 1-bed sets it as £170 per week, which is the rate it should have been set at.

    Despite my best efforts, a tenant took the property at the 2-bed rate but I informed him that the freehold company would be looking for the flat to be restored to its original layout otherwise they would attempt forfeiture of the lease.

    The tenant obviously notified his landlord of the situation because at the time of writing this, the flat in now up for auction, again being sold as a 2-bed flat!

    The onus of all buyers of residential property is that of ‘Caveat Emptor’ (buyer beware). If someone purchases this flat without being made aware of the situation then they will immediately be faced with having to restore the property to its original layout otherwise run the risk of the lease being forfeited!

    I’ve contacted the auctioneers and provided them with this information, something that not unsurprisingly the Special Conditions makes no reference to.

    I am of course hoping that the flat will be pulled out of the auction or the informatino I’ve provided will be added to the Lot information but I wait to hear!

  10. An update to my previous post. The flat was not pulled from the auction but an announcement was made that freeholder permission was not granted to convert a one-bed flat into a two-bed, before the bidding started.

    Nevertheless it STILL went for £30,000 more than the previous owner paid for it DESPITE the fact it was illegally rented out as a two-bed and with a tenant in situ ON A 2-bed LHA rate!

  11. What happens if it is the vendor who pulls out? Can I force them to complete the transaction? If not, can I take legal action to retrieve the costs which I have incurred? Survey, auction fee, solicitor fee etc…

  12. Thanks for sharing wise words. I am really surprised that auctions are only in the best interests of the sellers and not the buyers. Buyers beware, get the legal stuff checked before you bid.

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