How auctions work
Property auctions take a lot of the to-ing and fro-ing out of the property buying process. Instead of submitting offers through an estate agent, buyers gather in a room and bid for property.
Each property – or group of properties – for sale is referred to as a 'lot' and proceedings are led by an auctioneer. The auctioneer introduces each lot offered for sale, acknowledges bids, and announces whether lots are sold or unsold and their final bid prices.
The buyer is legally obliged to complete the sale within 28 days.
Auctions tend to be aimed at the trade market, focusing on people like property developers, says Lamb. But if you want to get involved yourself, here are some tips that you should follow.
Before the auction
You should never just turn up to an auction and start bidding – you need to get a feel for the market first.
It’s essential that you know what to buy, where and how much you want to pay for a property.
“Do a lot of research,” says Lamb. “Trawl through and make sure you know what you’re buying.”
He recommends giving it a couple of months to go to an auction or two, speak to an auctioneer, work out what you need to know and how much money you need to borrow, if necessary.
“Oh, and find a solicitor who’s familiar with property auctions. It’ll save a lot of trouble,” he says.
Requesting a catalogue will help. It will include a list of properties up for sale, together with detailed information and guide prices for each lot. You can subscribe to catalogue mailing lists from the big auction groups such as Savills, Allsop and the Essential Information Group as well as Andrews & Robertson.
Types of property
At a typical auction, there tends to be a pretty mixed bag of properties, ranging from tenanted homes to run-down housing stock in need of complete refurbishment.
“Our stock comes from multiple landlords, local authorities, private investment companies and sometimes repossessions. It tends to be businesses rather than individuals, but if they’re individuals, they’re usually traders,” says Lamb.
Other lots are estate or probate sales or quirky properties. Auctions also attract vendors who want to sell quickly. Some will be repossessions which are being sold by the mortgage lender – you’ll know a property is a repossession as it will say “for sale by order of the mortgagee”.
Other sellers might be moving abroad at short notice, relocating within the UK, or getting divorced.
Some auction properties will need extensive renovation work. It can be difficult to get a mortgage for uninhabitable properties so those that need a full makeover will generally be bought by cash buyers.
Some properties sold at auction will be quite niche investments. Buy a property with a 10-year lease for example, and you could end up handing it back to the freeholder in a decade’s time leaving you empty-handed.
Budgeting
In general you have a better chance of finding a bargain at auction than in an estate agent’s window. After all, there is no estate agent there to push up prices and the seller won’t leave you waiting by the phone while he or she mulls over your offer. And if no one else bids – you win!
But before you enter the auction room, decide on a budget and stick to it. Never get caught up in the emotion of the auction and never bid above your pre-set price. Keep a clear, cool head, and if you think you might be unable to do this, get a solicitor or auctioneer to do the bidding for you.
Lamb says that property auctions are ‘dictated by budget’. It will vary but at Andrews & Robertson the average property or land tends to go for £200,000-£700,000.
However, Lamb has seen land being sold for as much as £5.5 million.
The cheapest he has sold was an in-fill row of houses with one missing – but the missing property had planning permission to build a new one in its place. Each of the other houses were worth £60,000 when they were built. What did the whole lot cost, you ask? A tiny £350.
When working out your budget, take professional costs into account. As with a traditional purchase, you will need a solicitor to do the conveyancing and you have to pay Stamp Duty.
Not only that, you’ll need to stump up cash for surveys, valuation and legal searches before the auction even begins. You’ll need to put a 10% deposit down on auction day, so make sure you factor that in too.
In effect, it’s a gamble. If your bid isn’t the winning one, your money will be gone. However, it’s cash well spent and could save you thousands of pounds in the long run.
“It’s also wise to spend money on a solicitor to look through the legal pack and have it approved before the auction,” says Lamb.
Surveys and searches
With a sale through an estate agent you’d only get a survey, valuation and legal searches done after having an offer accepted. But with an auction you need to get all this sorted beforehand.
Be sure to have some money in place to cover the costs before you get to the auction house.
When the property is being surveyed, Lamb says that you should be looking for anything that will make the property unmortgageable. “It could be anything really”, he says, citing a lack of fittings in the kitchen and/or bathroom and Japanese knotweed in the garden as two possible reasons.
What’s more, mortgage lenders won’t lend until a valuation and some other checks have been completed, and with good reason, so cash buyers should exercise the same caution.
Mortgage
If you're not fortunate enough to be a cash buyer, you'll need help from a mortgage lender.
This is when the 28-day completion deadline might be a problem. Can your mortgage lender move quickly enough? To speed things up you’ll need to get a decision in principle, mortgage valuation and certain legal checks done before auction day.
This will mean losing money if you don’t win the auction but failure to get organised could mean you can’t complete in 28 days as required.
When choosing a mortgage lender make sure they can work to the 28-day deadline – a broker can advise you which lenders are worth applying to.
If you bid higher than expected, don’t expect too much leeway from your mortgage company.
Mortgage lenders will only lend you the amount the property has been valued at (minus whatever deposit you are expected to put down to get that particular deal). It doesn't matter to them whether you have paid more than that figure.
And if you haven't got the funds to make up the shortfall between the mortgage lender's valuation and the price you paid, then you will lose the 10% deposit you put down on the day of the auction.
Viewings
If you find a property you're interested in, go and see it. Only by viewing the property can you find the true meaning of ambiguous catalogue terms such as 'in need of upgrading' and 'in poor decorative order'.
Unfortunately, one buyer found out the hard way about a property ‘close to the sea’. In 2010 Sue Diamond bought a six-bedroom property in Devon for £155,000 in a telephone auction.
However, she hadn’t viewed the property in person or had a survey done. Less than a week after the purchase part of the cliff fell away leaving the house precariously close to the sea. Three years later half the house fell into the sea leaving Ms Diamond’s investment a mere pile of rubble.
Check the small print
The legal pack should contain all the legal documents for the property, including its entry on the Land Register together with other legal searches required by the mortgage lender (for example, the environmental and local authority searches).
These are required because they can reveal problems which affect the value of the property.
The pack should also include any 'special conditions' relating to the sale. It is absolutely vital that you read these, as they list specific details which fall outside the general conditions of sale.
This can be anything from a shorter completion date to the seller requiring the reimbursement of part or in some cases all of their legal fees. The last thing you want in a no-nonsense auction is to suddenly be surprised with additional costs because you didn't take the time to read about the paperwork.
A note on guide price vs reserve price
Be careful not to confuse reserve price with the guide price in the catalogue. The guide price is an indication of the seller's expectation while the reserve price is how much the auctioneer will accept for it. The latter price is usually kept between the seller and the auctioneer. There should be no more than 10% difference between the two.
This property in Middlesex had a guide price of £490,000. The highest bid was £514,000 which was rejected, and it's now going for £520,000.
Photo credit: Andrews & Robertson
Guide price: £490,000
Highest bid at auction (19 September 2017): £514,000
Now available: £520,000
To get a real idea of how much you should set aside for the property, take a look at the price of other properties in the area using the Land Registry website.
Bidding on auction day
On the day make sure you arrive in plenty of time and get a good seat so the auctioneer can spot your bidding signal. Others aren't so savvy.
“Some people sit at the back and put their hands up at the last minute, then the hammer goes down,” says Lamb.
When you arrive, pick up an 'addendum sheet'. This includes any amendments and additional information to the properties listed in the auction.
When the bidding on your chosen property begins, use your hand or catalogue to signal a definite intention to bid and catch the auctioneer’s eye. If they receive a bid higher than your own they will return to you in case you wish to better it. They will also warn you when the bid is about to be closed, usually three times: "for the first time, for the second time, for the third time and final time - sold!"
Lamb says that there are no tricks from auctioneers to try and up bids: “It’s just being as persuasive and enthusiastic as you can. We’re reacting to the room.”
“We don’t use any coded language. Most auctioneers don’t even give a description of the property. It’s up to the bidder to decide whether or not they like it.”
Catalogues don’t have many photographs either – it encourages bidders to go and look at the actual properties.
Other ways to bid
You also have the option to bid by telephone or online. If you’re bidding by phone you ring up the auctioneer on the day and place your bids based on your budget. People also ask friends and family to go along, they phone the person up during the auction and bid in real-time through their friend or family member.
You can also register to bid online if you know you’ll be in a different time zone. The auction house will be able to bid on your behalf up to your pre-agreed maximum bid.
“The advantage of this type of bidding is that you don’t have to be there on the day,” says Lamb.
“But you can’t get a sense of the atmosphere or gauge what’s going on. There’s also the off-chance the phone line will go dead.”
If you win
If you win you will need two pieces of identification as well as a cheque to cover the 10% deposit – you cannot pay this by cash or credit card. You will be asked to sign and exchange contracts in the auction room.
The fate of unsold properties depends on the property itself. Some will get revalued and brought back to an auction at a later date. If it was brought in by an individual seller, they might decide to hold onto it or do something else with it entirely.