Blog

by Linda Kirk

Property Auctions are often popular with investors and buyers who are looking to get a bargain however buying at auction can be risky as properties can have structural or title issues.  It is therefore very important to seek legal advice before attending the auction to bid for a property and also important to inspect the property and consider taking a surveyor with you to identify any structural problems.

There are now two types of auction.  The traditional auction is where the buyer pays a 10% deposit immediately and exchanges contracts as soon as the hammer goes down and your bid is accepted.  This means at this point you are contractually bound to purchase the property and complete 28 days later.  If you do not complete 28 days later then you would be served with notice to complete and should you be unable to complete within the notice period the seller could rescind the contract and forfeit your 10% deposit.  There is also a risk they could pursue you for other losses which they incur as a result of your breach.   Often the notice period in auction contracts is reduced from 10 working days to less so you really need to ensure you have your funding in place and will be in a position to complete within this time scale.  It is also important to do your research about the property before you attend the auction and be sure to understand the price you are prepared to pay for the property and the maximum price you want to pay for the property as often people get carried away during the auction process and this can result in your overpaying for the property.

The other type of auction is the modern auction.  This is where the buyer pays a reservation fee when their bid is accepted.  Generally this is around 5% of the purchase price.  The buyer then has 28 days to exchange and completion must then be within 28 days from exchange.  This method can be expensive and you need to factor in the reservation fee when deciding what to bid for the property as this fee is not deducted from the purchase price and does not form part of the deposit it is purely a fee you pay to the auction company.

At Adkirk Law we offer a pre auction check.  This will involve us checking the legal pack and doing a report for you on the title and documentation within the pack.   If you are successful at the auction the cost of the pre auction check is deducted from the legal fees charged for purchasing the property which means this is cost neutral to you if you are successful in purchasing the property.  This will avoid you purchasing a property with legal issues that could potentially cost you or avoid you purchasing a property that is unsaleable or mortgageable.

Often auction contracts have provisions in them where you have to pay for the sellers legal costs and auction pack fees.  This can amount to several thousands of pounds so it is very important to check the special conditions in the contract.  In addition you would of course have to pay your own legal fees, stamp duty, auctioneers fees and any renovation costs so it is very important to work out your costs before attending the auction.

You can obtain a bargain sometimes at a property auctions but there are some risks that you need to be aware of:

1. Overpaying for the property. Please do your sums before you attend and be clear on what the maximum is you are prepared to pay.  In addition always consider the fact that you may go over budget with your renovation costs or the project times may over run.  Both of these matters could eat into your profit margins.
2. There may be legal issues such as unresolved disputes, planning or building control issues, structural problems or title issues for example short leases.
3. Auction properties are sold as seen. Therefore you need to understand what repairs or defects need to be carried out and not all of these will be visible from an inspection of the property.  This is why it is important to take a surveyor to the property to inspect it before the auction takes place.
4. With traditional auctions you are legally bound to buy the property as soon as your bid is accepted and the hammer goes down. The onus is therefore on you to do your own due diligence and the principle of caveat emptor applies which means buyer beware.  You will have no recourse to the seller if you subsequently discover any defects or issues.
5. The auction pack should contain the title and searches (it is important to have a Local Search, Water/Drainage Search and Environmental Search). Not all auction packs will have all these searches and some may not have any if the searches are not back in time.  If all the searches are not available it would be prudent to have them carried out as they can reveal matters which could affect the value of the property or your use and enjoyment of the property.  You should also have in the auction pack an Energy Performance Certificate, Property Information Form, Fixtures Fittings Form, Leasehold information and special conditions.  The special conditions will set out terms of the contract which will be legally binding on you.  Please ensure you read the special conditions.
6. It is important to check the Land Registry portal and obtain up to date office copies and also check the day list for pending applications. You need to ensure that the seller is the legal owner and has the right to sell the property.  Sometimes the seller may not be the legal owner on the registered title due to the fact they have recently bought it and are immediately reselling.  This adds additional risk to you as their application for registration will need to be completed before yours and if there are issues with their registration it will delay you being registered as the legal owner.  If you are getting finance to fund your purchase some lenders do not like back to back sales.
7. Ensure you have the correct type of survey carried out. Speak to a qualified surveyor who will advise you on the various surveys available depending on the type of property you are purchasing.
8. Ensure your funding is in place before bidding for the property. Lenders have different criteria and it is important to know you can obtain the finance and that the property meets the lenders criteria.  Often people obtain bridging finance to purchase a property at auction but these are short term loans and you will need to have an exit strategy in place i.e. to refinance or sell the property with the bridging finance term.  This type of finance can be expensive.

If you require any further information about auction properties or would like a quotation please contact Linda Kirk of Adkirk Law on 0797 0331115 or linda.kirk@adkirklaw.co.uk