Buying Property at Auction

A Guide To Property Auctioning And Financing

What types of people tend to sell properties at auction?

For most property owners, the main attraction behind selling at auction is the sheer speed at which a deal will go through. When you think of the stress of being caught up in a property chain, or the annoyance of patiently waiting for someone to show interest on the open market, you start to realize that losing a few thousand pounds on a real estate transaction is quite a healthy sacrifice to make. This is especially true if you are the type of person who is liable to start pulling out hair when faced with a frustratingly long wait for a transaction to go through that might never take place.

Of course, a hefty percentage of those selling at auction are not made up from residential homeowners looking to sell up and move on at all. Moreover, they tend to be third parties such as mortgage and secured loan providers who are trying to recoup secured funds from broken finance agreements. When you turn up at an auction for the first time, you will also encounter a number of properties on offer from professional builders, construction companies and property investors at all levels that are looking to sell their real estate assets quickly.

The benefits of buying property at auction

Property owners who sell at auction are typically willing to accept a much lower price than the open market value in return for a fast sale and a relatively quick transference of funds. Therefore, the most obvious advantage of purchasing a property at auction is the simple fact that you can pick up a real bargain, assuming you have the cash to cover the deposit and a suitable financing strategy that can be put into place quickly once the winning bid has been accepted.

Once you have made a winning bid on a property that you are interested in, you can then relax safe in the knowledge that the deal will definitely go ahead. This is due to the fact that you are automatically entered into a legally binding contract with the seller once your final offer has been accepted. This means that you will not be upstaged and outdone at the last minute by another buyer offering more money for the same property, which can sometimes happen when buying through a real estate agency.

So, where do property auctions actually take place?
If you have never been to property auction before, or even heard of one taking place, then there is a perfectly sound explanation for this. The fact of the matter is that property auctions have always been somewhat secretive in nature, especially in terms of being advertised to the public. As property auctions are typically reserved for professional investors and their exclusive little network of friends, with a touch of detective work you should be able to find out when and where the next set of bargain priced properties will be up for grabs.

Once you have decided on the area where you would like to buy a property, the next step is to locate the actual auction houses that deal in properties for that region. There are a couple of useful websites that will provide you with the relevant information you will need and these are the Essential Information Group website and the UK Auction List website.

The properties themselves are listed in an auction catalogue which is usually published around a month before the auction takes place.

How to prepare for an auction

When it comes to buying a property at auction, the last thing you want to do is turn up unprepared. You should familiarize with the properties in the catalogue well in advance, and make arrangements to view the properties you are interested in personally. If you are prepared to put the work in, there are some real bargains to be had at auction, although the greatly reduced prices are often reflected by the condition of the building that is up for bidding. If you are not an expert yourself, then take a friend along who is, or perhaps invite an architect or builder along to inspect the property. That way, you will have a much better idea of what the work will entail and how much it will cost to put everything right.

Remember, it’s only an auction and that you don’t have to bid at all if you aren’t comfortable or interested in any of the properties available. You could just go to familiarize yourself with everything so that you are more experienced and better prepared when you go to an auction where you will be making serious bids.

What are the costs of buying at auction?

There are a few things you will need to pay for when you make a winning bid on a property at auction which include the following:

Auction House fees

The auction house will expect you to pay an administration fee to cover their costs and this is normally around £250, depending on the auction house itself.

Solicitor fees

You will also need to pay the fees of the conveyancing firm you have chosen to take care of the legal aspect of the purchase.

Stamp Duty

If the purchase price of the property is over £125,000, you will need to pay Stamp Duty Land Tax. Anything lower than this, or under £40,000 if you have more than one property, and Stamp Duty rate falls to 0%. Stamp duty ranges from 2 to 15%, depending on the amount a property is sold for and the number of properties the buyer owns.

Of course, once you have bought a house at auction, you will obviously need to insure it so that your investment is financially protected.

Deposit and House Price

There is usually a 10% deposit to be paid on the day of the auction, once the winning bid has been accepted. After this, the buyer has 28 days to pay the remaining 90% of the house price. You could apply for a mortgage in principle before the auction, so that you know how much you can afford to borrow and when to stop bidding. However, you might be better off with a bridging loan depending on your personal requirements and intentions of what to do with the property.

What are the most commonly used financing options for auction purchases?

There are a number of funding options designed to help those who are looking to buy property at auction and these encompass a wide range of short and long term financing solutions. Over the past few years, there has been a considerable rise in the number of first time homebuyers, buy-to-let landlords and property investors in general who are using bridging loans as their borrowing product of choice.

In most cases, a short term bridging loan provides the perfect solution for the interim, offering time to think and the required breathing space to organise a more suitable long-term solution such as a mortgage or secured loan.

Are bridging loans really that useful?

There are many benefits associated with the use of bridging loans to cover the cost of buying property at auction. In a time-critical arena like this, the obvious advantage of bridging products is the speed at which loan applications are processed and approved. A decision to lend can be made well within the hour and the required funds can be transferred to your bank account in little more than a few days.

When you buy a property at auction, you will almost certainly be required to make an initial deposit covering a bare minimum of 10% of the agreed sale price. The auction house commission fees may also be added to this amount and, in most cases, they are usually paid upfront at the same time. You will then be given 28 days to secure the rest of the funding, which is ample timing to get a bridging loan approved and paid out.

As well as being quick to arrange, bridging loans are also highly flexible. Unlike a traditional mortgage from a mainstream lender, the application criteria are remarkably less stringent and the amount borrowed can be secured against almost any type of property imaginable even if it is in a poor condition.

What about Buy to Let Mortgages?

If you are buying an auction property with a view to renting it out then a more specialist borrowing product such as a buy to let mortgage is highly recommended. Of course, you will need to act quickly in order to ensure the funds are available to complete the deal within the 28 days allocated in the contract. Whereas the lending criteria on bridging loans is generally quite relaxed, buy to let mortgage providers are a lot pickier when choosing their customers. Your credit file, employment history and ability to afford the monthly repayments will all be given careful consideration when you apply for this type of finance and this is why many people are turned down for such finance.

Even if your borrowing history serves as a glowing example to the rest of mankind, it is important to remember that your application may not be accepted if the property you are in the process of buying is in need of extensive repair work or renovation. This is because banks and building societies always want to get their money back as quickly as possible if a borrower defaults on repayments. The chance of selling a property at a decent asking price is generally quite slim when the building itself is in due need of care and attention and this is another hurdle that you may run into.

When you apply for a bridging loan, bridging lenders are interested in your ability to make the final repayment and this is essentially referred to as the ‘exit strategy’. Unlike a conventional mortgage, bridging loans are not paid back in monthly instalments with an annual interest rate factored into the arrangement. Instead, bridging loan interest rates are calculated on a monthly basis and the net loan amount plus any additional fees and charges are typically rolled up and added to the gross balance, which is settled in full at the end of the term.

Another key difference is the fact that bridging loans are only intended to be short-term products, with borrowing terms ranging from 1 to 24 months. However, a select few providers have recently been testing the waters with slightly extended repayment terms, and you will now see the occasional bridging loan being advertised with a 36-month product lifetime.

How and where should I apply for property finance?

When it comes to property finance, you may quite understandably find yourself at a complete loss as to how and where to apply for an appropriate funding solution, especially if you are looking for the most favourable borrowing terms with the lowest rates and charges. In fact, being able to source, compare and weigh up the advantages of one product against another could quite easily become a full-time job in itself. Even if you apply for finance directly online using the in-house services of a principle lender, there are no guarantees that you will get the best deal or that your application will be a success.

The most practical solution is to seek out the services of an established broker with a proven track record and a respectable reputation for outstanding customer service. You should certainly make sure that the firm you approach is FCA regulated as this will ensure that the company is entirely obligated to find a suitable funding package for you that is completely in line with your individual requirements and best interests.


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