The rising sold property prices of the last decade or so have pushed many buyers to be more inventive in their search for a home. For a significant proportion, this has meant property hunting via auctions.
Although perhaps fuelled initially by the popularity of TV shows such as "Homes Under the Hammer", it is no longer merely investors who see the appeal of an auction. And, even now that growth is slowing, interest in buying at auction shows little sign of waning. Figures from one UK auction house suggest a 10% rise in the number of listings during the first three quarters of 2022 when compared to the same nine-month period in the previous year.
Q: I need a mortgage. Can I buy at auction?
A: While it's true that auction purchases were once largely restricted to cash buyers (who tended to be investors with either deep pockets or the ability to leverage on their existing portfolio), this is no longer the case. Mortgage providers woke up to the growing interest in purchasing at auction some time ago - and are now used to applicants enquiring about applying for a mortgage to help them buy an auction property. That's not to say, of course, that applications are assessed any less stringently than those for purchases to be made through an estate agent.
Q: OK, so a mortgage to buy an auction property is a possibility. What else do I need to know?
A: There are several points to think about before getting carried away with the auctioneer's catalogue.
1. Most mortgage providers will only lend on auction properties that are "immediately habitable". This means that a property must be watertight (and, particularly, with a roof in good repair), have a functioning kitchen (though this can be basic) and a working bathroom (that must include an indoor toilet). This list of stipulations inevitably rules out a fair number of homes that come up for sale at auction.
2. Make sure you have a mortgage in principle in place before attending an auction. This will give you your bidding limits. While it's never a good idea for anyone bidding on a property at auction to get carried away and continue bidding past their own upper limit, it's particularly important for buyers relying on a mortgage. Bid more than the bank is willing to lend and you risk not being able to complete the sale. If this happens, you'll lose the upfront payment any successful bidder must make at the end of the auction.
3. An agreement in principle is only the first safeguard. It's also a very good idea to have checked whether your lender is willing to lend on the particular property that you want to bid for. Even if you're confident that they will lend on it, you cannot be sure how large a mortgage you can get until the lender has valued the property. Too low a valuation and you could have a funding gap that means you can't complete the purchase and, as above, still lose your upfront payment.
4. If at all possible, it's well worth commissioning your own private valuation and survey of any property in which you're seriously interested. This is for the same reasoning as if you were buying via an estate agent. Your lender's only concern is whether it will get its money back should the property need to be sold. Your concerns ought to be wider in scope. For example, is the roof likely to need replacing in the next few years? Provided that it's currently watertight, the lender is unlikely to care, but you will if you're suddenly faced with a five figure bill for repair work.
5. When using a mortgage to help finance the purchase of an auction property, it's essential to check that the lender can work to the completion deadline set by the auction house. This is usually 28 or 56 days - and there will be no flexibility to this deadline. If your mortgage provider can't accommodate this timescale, you may need to investigate a bridging loan.
Q: I want to buy a property that won't fulfil a lender's "immediately habitable" criteria. However, I don't have the finances to do it without help. Do I have any other options?
A: You could consider a commercial loan. However, be aware that the applicable interest rates are likely to be considerably higher than anything you'd be offered on a mortgage. This may encourage you to expedite the necessary renovations to the property in order to make it eligible for a mortgage as soon as possible.
Q: Should I view a property that I'm interested in?
A: Yes! The auctioneer may arrange an open house for interested bidders and this is the ideal opportunity to view. If there is no open house, you should still contact the auction house to arrange your own visit. If this isn't possible, you should be offered a virtual viewing (which may be pre-recorded).
Q: What other due diligence should I undertake before bidding?
A: In addition to getting your own valuation and survey, it's always sensible to tick off the items on the following list.
1. Read the legal pack - and consider paying a property solicitor or licenced conveyancer to read it too.
2. Assess the property's market value. Remember, this won't necessarily correlate with a mortgage lender's assessment. However, your own independent valuation is a good place to start. You should then try to relate it to the current market in the area. Look at recent sold property prices. Are similar homes going for the sort of price you expect your property to fetch? Don't forget to account for the cost of any repairs or decorative work that you intend to undertake.
3. On the day of the auction, check for an addendum sheet. This is a document published by the auction house after the printing of the original listing. It will detail any amendments or corrections to that original listing.
Q: I want to bag a bargain. Do you have any tips for me?
A: Consider looking for a probate sale. These sellers are often keen to dispose of a property as quickly as possible, and this may mean that they will accept a lower price in order to do so. Additionally, although this is easier said than done, you may want to avoid auctions that attract a lot of investors. Their pockets are often deeper and so they may drive up bidding prices.
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