Five tips for buying a property the right way at an auction
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As Director of commercial finance brokers Advocate Finance Ltd, David Tonks has over 25 years of experience in the property market. Here, he gives his advice for buying at an auction.
Purchasing a property at auction is a popular alternative for many property investors in London. It can be very exciting and potentially very profitable. I have a number of clients who have made hundreds of thousands of pounds with astute purchases at auction.
It pays to plan ahead if you’re considering an auction purchase. The following five tips will help you stay ahead of the game and ensure you have the financing in place on auction day.
Tip 1: work with an experienced adviser/broker who has knowledge of the auction financing process
The main issue with financing a property at auction is finding a lender that can meet the deadlines required. Typically with an auction purchase you need to complete the purchase within 20 working days; some conditions of sale specify a 15-day completion deadline.
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These are very tight deadlines that high street lenders cannot usually work to. The good news for potential purchasers is that specialist lenders have dedicated departments set up to meet these challenging deadlines. Approvals can be obtained in four hours, valuers and solicitors can be instructed on the same day that you purchase the property, and mortgage offers made within 24 hours, ensuring the tight deadlines can be achieved.
Tip 2: work with an experienced and fast solicitor
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Before bidding on any auction purchase, I always advise my clients to get their solicitor to view the legal pack. When any property is being sold at auction, the vendor’s solicitor puts together a legal pack consisting of the legal documents associated with the sale: for example, the title deeds, special conditions of sale, land registry search, leases (if applicable) and other pertinent documents.
Your solicitor should view this pack before the auction to ensure you will gain good title to the property and that the title is suitable for a lender to provide a loan on. If a lender cannot get good security over a property because of some defect or issues with the title, then you will lose your deposit if you cannot complete on the purchase.
If you can provide security over another property that you already own, then it might be possible to raise a loan on that property to allow the auction purchase to take place. Your solicitor can then work on correcting any issues with the title before remortgaging the properties. However this is not a substitute for your solicitor reviewing the legal pack before you bid.
Tip 3: instruct a surveyor or structural engineer if the property needs renovating or converting
Many of our property investor clients have contacts with surveyors they have worked with previously who then accompany them when inspecting a property being sold at auction. The surveyor will provide advice on any work that needs doing and the relevant costs to ensure your business case for buying the property stacks up.
For experienced property investors who have undertaken a number of refurbishment or renovation projects they might not be required.
If you see potential structural issues with the property then it is important that you ask a structural engineer to view the property. Ensure it is a structural engineer and not a just a normal surveyor as the former are the professionals when it comes to advising on structural matters.
If a property has structural issues it doesn’t mean a lender will not provide a loan. It will depend on the scale of the works required to rectify the structural issues and the costs involved.
We have arranged numerous auction loans involving properties with structural issues that meant they were unmortgagable for certain lenders. This was possible because a structural engineer was able to confirm in a report what the structural issues were and the estimated costs for doing the works. As these costs were small in relation to the size of the property and fell within the customer’s budget, the lender had the necessary comfort to proceed with the financing of the property.
Tip 4: be aware of introductory interest rates and exit fees
If you appoint the right adviser to arrange the finance for you then you can relax as they will ensure these are not an issue. If you don’t use an adviser, or one that is not experienced in auction finance, then you need to take note of these very important points:
1) Be aware of introductory interest rates. These are offered by certain lenders who advertise low interest rates but whose small print reveals this is only for a limited period of three months, after which the interest rate doubles.
2) Avoid hefty exit fees. Another fee to watch out for is the exit fee. This is a fee that some auction finance lenders charge when you settle the loan and is expressed as a percentage of the loan amount.
3) Is interest charged daily or monthly? A number of the specialist auction lenders charge interest on a monthly basis. This means if you settle a loan on day one of the start of a month, you pay one month’s interest and not one day’s. The difference can be thousands of pounds.
Tip 5: don’t get carried away with the bidding on the day.
As bidding increases at an auction, it’s easy to get carried away. Lenders will only provide loans up to the valuation of a property, so if the independent valuer appointed by the lender does not value the property for what you have bought it for, you could have a funding shortfall.
Unlike a normal purchase through an estate agent, you cannot go back and renegotiate the purchase price to close this funding gap. With an auction purchase you have exchanged contracts and the purchase price is fixed, so overpaying for a property can lead to a funding shortfall that you will need to meet.
Try to have a maximum bid that you don’t want to go over and stick to it. It should be based on your research and knowledge of the local market and will ensure you don’t overpay for a property. It can be very tempting to go over budget, especially if you’ve invested a lot of time and money prior to auction, but it will ultimately mean less profit is made further down the line.
NB. You should always seek professional advice from a financial adviser/mortgage broker before proceeding with any loan or mortgage application.