Auctions – A goldmine for investors or a landmine waiting to go off?

— Tips and traps to be aware of when buying a property at auction —

Thinking of buying land at auction?  Whilst it can be a veritable Garden of Eden, as with most investments, it is not without inherent risks.  Fortunately, most of these risks can be avoided by taking a cautious and considered approach.

If you are new to the game, it is worth going to an auction and getting a feel for the process and how it all works.  Many auctioneers offer “how to” sessions where you can learn the basics of buying through auction and it is fun to experience.  However, once you are familiar with the general process, there are several common points to check/consider.

1. Hidden increase in purchase price

Always check the special conditions to the auction contract.  It is increasingly common for a seller to add a special condition requiring the buyer to pay an amount equal to 1 – 2% of the purchase price.  This is a requirement hidden in the contract and often missed by buyers.  It will not only increase the purchase price, but directly impact on the level of Stamp Duty Land Tax payable.

2. Insufficient information

Be aware that once you have made a successful bid and the hammer falls, you will be bound to buy the property and the Seller is limited as to the information it is obliged to supply.  Many sellers refuse to assist with additional enquiries that can be raised.  This can be particularly important where a buyer is seeking finance.  Whilst some lenders are willing to take a commercial view on areas where there is insufficient information, there are others who are not.

It is sensible to review the auction pack before the auction and try to obtain as much information as possible.  If information is missing, this can often be flushed out by speaking with the auctioneer beforehand.

3. Lack of searches

In theory, a seller is supposed to provide an auction pack which contains relevant information about the property, including a standard set of searches.  Invariably, a seller will not provide the full set of searches.

Most auction contracts require the buyer to reimburse the cost of the searches.  If a seller has not provided one or more of the searches, you can usually get them to implement a search on the basis that they will recover the cost on completion.  It is important to get a full set of searches before the auction.  Although indemnity insurance for lack of certain searches can usually be obtained, it is not always available.   Additionally, not all lenders are happy to rely on “no search” indemnity insurance. 

4. Stick to your upper limit

Being in an auction house is like being in a gladiator’s coliseum (without the lions or semi-clothed gladiators fighting to the death).  Adrenaline packed.  It is exciting and you want to win.  It is very easy to get carried away in the bidding process and can end up spending much more than you budgeted for.  Indeed, sellers rely heavily on buyers getting carried away.

Do your calculations, ascertain your upper limit and do not go beyond.  Yes, even if it means you won’t win the battle or crowning glory from the Roman Emperor.  If the Property is down-valued, it can affect the level of finance available and if your intention is to develop the property, it can impact on cash flow and profits.

5. Why is the property being sold at auction?

Often a seller will put a property in auction because they have been unsuccessful in selling through other means.  You should be weary as to why.  What is the seller hiding?  Is there a defect?  Almost all defects can be cured at a price and if you are willing to do what is required, the fruit of your efforts can be quite sweet.  However, some defects can be a deterrent and you should inspect the property and auction documents carefully so that you know, with eyes open, what you are committing to.

6. Finance

If you are not a cash buyer, it is very important to make financing arrangements early on.  Ideally, you should be speaking with a lender or broker before the day of the auction.

David Stranks, founder of Stranks Associates (http://www.stranksassociates.co.uk/) and financier for over 15 years, commented:

“One of the most common reasons for a buyer failing to complete on the contractual completion date is due to finance not being available on time.  Short term lending can be a useful and efficient way of temporarily financing an auction purchase.  It is crucial to bottom this element out early to avoid delays later on.”

The above list is not exhaustive, and if you are thinking of going to auction, it is sensible to engage a solicitor beforehand.  This will help flush out many of the risks involved.

By Miles Fish – Property Law Solicitor at DWFM Beckman

If you have any queries or would like to engage a solicitor, you can speak with our designated Auctions Team by calling 0207 408 8888 or emailing info@dwfmbeckman.com.

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