Buying at an auction can give you the opportunity of getting a property at a bargain price, which will increase the potential yield and profit margin of your buy-to-let investment, but there are risks.
The key to success in purchasing a buy-to-let property at auction is preparation.
You need to think in advance about the type of property you want to buy and stick with that plan. Many different types of property will be listed in the auction catalogue so don’t be tempted to bid for one if it does not adhere to the strategy you have considered and decided upon in advance.
There are loads of places to look for an auction property but the best way is to subscribe to a mailing or email list then you can be amongst the first to see the property and you will have time to complete your research before the auction.
If you are serious about buying a property at an auction, you need to get the paperwork and finance prepared.
In practical terms, unless you are a cash buyer, this means you need to apply for a decision in principal from a buy-to-let lender on a specific price and then pay for a valuation survey to be carried out by the lender which could take five days.
You then need to wait for an offer for the exact amount you require, which can take two to four weeks.
On auction day itself, you need to bring two forms of identification, the auction catalogue, the details of your solicitor and your deposit, because if you are successful in your bid, you need to pay the deposit when contracts are exchanged which happens when the hammer falls on the day.
Make sure you know the maximum amount you can pay and be sure not to go above this amount.
If a property does not reach its reserve price, it will be withdrawn from the auction and you can talk to the auctioneer afterwards about a possible sale.
The completion of a sale usually takes about 28 days, though this can happen sooner. The balance of the money will be paid on completion and this element will be handled by the solicitor.
Benefits of buying at auction
There are no standard figures, but you can expect to pay on average 25 per cent less for an auction property. Obviously this depends on the type of property, the location and the condition of the property and what remedial work needs to be done to get into a position where it can lived in or rented out.
If you are a cash buyer in particular, you can cut costs by purchasing outright and not pay any extra costs of getting finance such as interest payments.
If you are not a cash buyer at an auction, you will need to put down at least 35 per cent and then budget around 10 per cent of the purchase cost over the next six months in bridging finance costs until it can be refinanced onto a buy-to-let mortgage if you have been unable to get this in place in advance.
If you already have a portfolio of properties you can release enough equity to effectively become a cash buyer. You need to allow at least two months to complete a remortgage but once this is all finalised you are in the strong position of having everything in place and being able to wait for the best deal to come along.
Sometimes, as well as bargain prices, auctions throw up interesting properties that are suitable for an individual to renovate.
House prices are still below their 2007 peak and due to the recent economic problems in the UK since the crash of 2008, there are more properties available through auction houses because repossession rates have gone up, though not by much. There are properties available at significantly reduced amounts.
When a property is repossessed and the owner is looking for a quick sale, it is usually sold through an auction rather than through an estate agent.
If you want to buy a property quickly, an auction can achieve this for you, but it is vital to have done all of your preparation in sequence so everything is ready as it needs to be. Once the deal is done on auction day, everything else has to be completed within 28 days.
Without the cash readily available to buy a property at auction, as well as high financing costs, you must ensure you have a letter from a lender offering the loan before you risk winning the bid, pay the 10 per cent deposit or you risk being sued if you can’t complete the transaction.
Even if you have all the paperwork and finance prepared in advance of purchasing a property at auction, the finance offer can be withdrawn by the lender at any time up to the date of completion.
Contracts must be exchanged as soon as the hammer goes down to finalise the bid, so you will have to pay the 10 per cent deposit straight away if you are successful. You will need finance in place because the remaining balance of 90 per cent needs to be paid within 28 days. If you can’t complete, you lose your deposit.
It is also vital to have the property surveyed before the auction date so you can be sure everything is as it should be before the auction and you have an idea of potential issues and remedial costs.
Other normal legal checks need to be carried out on the property including a property survey and a valuation, all before the auction, which means you will be paying for costs on a property that you may not successfully bid for.
You should budget around £1,000 for valuation and legal fees and a further £500 or so for surveyor fees.
If you are using a mortgage to purchase the property, you need to have buildings insurance in place because this is required by lenders before a sale can be completed.
Buying at auction can be a risky and complicated process so it is essential to do your research and preparation carefully. Ensure you have the finance in place to go ahead with your purchase should you be successful at the auction and research the value of your potential purchase in advance so you do not pay too much.
Even with the best planning, you could still be outbid at the auction and the legal fees, valuation and surveyor costs could be wasted, but if you plan carefully, you will increase your chance of making a successful bid for a potentially undervalued property.
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