Take advantage of the repossessed

by Szu Ping Chan on 18 September 2010  |  12 comments
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If you want to nab a great property at a discounted price, the auction house is the place for you

The property market has changed an awful lot over the past couple of years, and it's not just those of us on modest incomes that have borne the brunt - even millionaire footballers are having a few sleepless nights about their mortgage payments.

Last week it was confirmed that Nolberto 'Nobby' Solano, the Peruvian winger who played for clubs like Newcastle United, West Ham United and Aston Villa, had suffered the ignominy of having his home in Gosforth repossessed, with £270,000 of debt still owed on the property he originally bought for £660,000 in 2007.

When you think of a repossessed property, inevitably your thoughts turn towards some dump that has been trashed, but in reality there are plenty of very attractive properties that have been reclaimed by the banks as even the wealthiest fall behind on their payments. And generally, the way to nab one of these bargains, is by purchasing at an auction.

Homes Under The Hammer

The main advantage of buying at auction has to be the no-nonsense approach to the sale.

Unlike the traditional route (which usually takes around 12 weeks from the day an offer is accepted until contracts are exchanged), once the hammer goes down at auction, you have effectively exchanged contracts, and neither party can back out.

This eliminates the anxiety many traditional buyers face before contracts are exchanged, such as being gazumped by another buyer with a higher offer, or being left without a home to move into if the seller decides they no longer want to sell their house.

At auction, if your bid is accepted, you pay a deposit of around 10% on the day of purchase, and generally have 28 days to complete the transaction. There is no property chain.

But the most attractive aspect of buying at auction, for me, is the potential to pick up a quirky property at a bargain, knock-down price. Homes often end up at auction because the sellers need to sell quickly. Many of these properties have been repossessed and have seen better days, so the reserve price can be low. Some will need extensive renovation work while others may be unconventional in some way, and so will only appeal to a niche buyer. 

All this means you stand a greater chance of finding a bargain at an auction than in an estate agent's window. After all, at auction, the seller can't mull it over and wait for a higher offer. There is no estate agent around to push up the price or advise the seller not to accept your offer. And if, on the day, nobody else is interested in buying the house you're bidding on, then it's yours for your first bid! 

However, it's not all plain sailing. And as buying a home is probably the single most expensive purchase you'll ever make, it's important to be aware of the pitfalls of buying at auction, as well as the benefits. So before you go bounding towards your next auction, here's a quick guide to what you can expect.

Great Expectations

The first thing you should do if you're looking to buy at a property auction is to request a catalogue. This will include a list of properties up for sale, together with detailed information and guide prices for each lot.

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While repossessed homes certainly feature, as mortgage lenders like to offload these properties quickly, don't assume that all homes for sale are those which have been repossessed. Estate executors and local authorities also often choose to sell their properties at auction. Quite simply, any seller who wants to sell their home quickly, without any possibility of a breakdown in the chain, will prefer an auction.  

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'.

You will also often discover things not mentioned in the catalogue. One lot which looked like a bargain was in fact located right next to a sewage works. A feature conveniently left out of the catalogue description, and something I only found out from visiting the site.

The catalogue will usually publish a viewings list, where you can go along to view the property at allotted times closer to the auction date.

Put Your Money Where Your Mouth Is

If all is well, then the next, and most important step is getting your finances in order.

If you're not fortunate enough to be a cash buyer, then you'll probably need help from a mortgage lender.

Some people mistakenly believe that just because a property is sold at auction, you won't be able to get a mortgage on it. This is not true. However, all lenders in England and Wales require you to have a survey and valuation completed before they will lend you any money. They also require certain legal checks to ascertain ownership of the land. And this means you will have to shell out hundreds of pounds in fees. Please note that different rules apply in Scotland, where buyers are offered more protection.

With a normal sale through an estate agent, you would only do this once your offer has been accepted by the seller. With an auction, you have to shell out these fees before the auction, as once that hammer falls on your bid, you are 100% committed to the purchase and must have your finance in place.

You may be reluctant to risk forking out for valuation and legal fees, for fear you will be unsuccessful on the day of the auction. You may be even more reluctant to shell out for a structural survey or homebuyer's report, which looks in more detail at the condition of the property.

However, if you close the deal only to find the survey reveals some major problems with the house, or the valuation falls short of the price you paid, then you'll be in big trouble. 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 on the auction.

There is another reason why it is risky to buy a property at auction without getting an agreement in principle from the mortgage lender beforehand: time. After the auction, you only have 28 days to complete the transaction or you will lose your deposit - and unfortunately, despite all the technological advances of the 21st century, it can still often take more than 28 days to apply for and get mortgage funding. That's why, if you are buying at auction, it's a good idea to use a broker who can put pressure on the lender to speed up the process.

Check The Small Print

Before the day of the auction, your solicitor should request a legal pack from the auctioneer. This 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, so even if you're a cash buyer I'd highly recommend you look over these carefully.

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 them.

The packs cost around £15 per copy or can also be viewed for free on the day of auction.

The Big Day

Once you've done all your homework, attending the property auction is as easy as pie. If you're looking to make a purchase, you will need two forms of identification to prove your name and address, together with your chequebook to pay the deposit and any auction fees.

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When you arrive, the first thing you should pick up is an ‘addendum sheet'. This includes any amendments and additional information to the properties listed in the auction.

Read this very carefully, as some changes listed are far from minor. In the property auction I went to, a misprint meant that one of the properties only had two bedrooms instead of three, and in one case the property was changed from leasehold to freehold. As this shows, you could make a costly mistake if you fail to take note of any changes before bidding.

If you can't make the auction in person, you can always make a proxy bid or bid over the phone. Details of how you can do this can be found in the auction catalogue.

Going, Going, Gone!

Once the bidding starts, it's very easy to get carried away, especially in such an intense atmosphere. You're likely to be surrounded by some heavyweight professional investors, some of whom have very deep pockets, and as I discovered, the slick haircuts to match.

Try not to be intimidated, but whatever you do, don't be tempted to bid more than you can afford or higher than the valuation of the mortgage lender. In the heat of the moment, raising your hand for just one more bid can end up snowballing into thousands of pounds.

Auction virgins are advised to sit in on a few auctions to get a feel of the atmosphere. Once you've gained an idea of what to expect, the actual process of completing the sale is simple, transparent, and final.

So if all goes well, it will be the quickest, and dare I say, the most exciting purchase you'll ever make - and hopefully at a bargain price too.

This is a lovemoney.com classic article, originally published in February 2008, and updated

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