Buying a house at auction? Why you should tread carefully
3rd October 2019
If you’re tempted to buy a house at auction, it’s probably in the hope of picking up a real bargain.
Many homes for sale at auction are repossessions. These are properties that have been seized by lenders because the previous owners failed to keep up with their mortgage repayments.
Lenders prioritise shifting them quickly and tend to set the asking price towards the lower end of the market.
This means you could get a repossessed home for up to 30% less than if it were being sold privately.
Bear in mind that lenders rarely do anything to prepare repossessions for sale. Some are grotty, or even uninhabitable, and you might not be able to get a mortgage.
You won’t always get a bargain
People often think they’ll get a fantastic deal at an auction, but it’s not always the case.
Plenty of homes go above the guide price, especially if there’s healthy competition.
When you’re bidding, you need to be careful not to get carried away and over-extend yourself as you can’t back out if you’re successful.
So decide in advance the maximum price you’re prepared to pay and stick to it.
Get a survey done
If you’re interested in buying a home at auction, search online for auction houses near you and check out what they’ve got for sale.
Properties are generally publicly listed 30 days before an auction, so if you spot something you fancy start doing your homework straight away.
Get a structural survey done if the auction house hasn’t already arranged one. And if you don't know much about renovations, and likely costs, bring a builder you trust with you to the viewing.
Time is of the essence
If you buy a house at auction you usually need to put down a 10% deposit and often only have 20 working days to pay the purchase price.
If you don’t pay it, you’ll lose the deposit and may have to cover the costs of reselling the property, as well as the gap between the price you agreed and the final selling price.
Speak to a broker to make sure you’re able to get a mortgage and line one up as soon as you can.
Otherwise, you might have to take out an expensive bridging loan while waiting for your mortgage offer.
If you don’t fancy going along to an auction to buy a home, like most things these days you can do it online.
There’s much less risk of panic buying as the sale usually takes place over 30 days, and you get notified by email when there’s a bid.
Like regular auctions, there’s a reserve price, which is usually around 10% more than the starting bid.
If you’re successful, you’ll have to pay a reservation fee set by the estate agent or auction. It’s usually at least 2.5% of the purchase price, with a minimum of around £5,000.
Pros and cons of online auctions
With traditional auctions you exchange contracts immediately and pay in 20 working days.
But with online auctions you have 28 days to exchange contracts and pay within another 28 days.
This means you have more time to get a mortgage if you haven’t already arranged one.
However, the considerable reservation fee, which is split between the auction house and the estate agent, isn’t refundable.
The HomeOwners Alliance (HOA), which promotes the interests of Britain’s homeowners and aspiring homeowners, said that online auctions were coming under fire because people don’t understand them. (1)
“It allows estate agents and auction platforms free rein to set the reservation fee,” HOA said. “Our investigation suggests some high-street agents are still getting to grips with how this works. This must be paid upfront by the winning bidder at the auction’s close by debit or credit card or bank transfer and can be anything upwards of 2.5% + VAT...
“People who think they’re getting a bargain may find themselves stung to the tune of several thousand pounds when they realise that paying the reservation fee is not like putting a deposit on a holiday.”
Think long and hard before buying at auction
“Auctions appeal because there’s always the potential to buy a property under its market value, but they come with many risks,” said Prakash Patel, a Mortgage Adviser at Trussle.
“Therefore, before you buy, you need to line up a mortgage and make sure there are no hidden defects.
“And don’t get carried away when bidding. Properties don’t always sell at a good price at auction, so avoid doing anything you’ll regret later on.”