Forewarned is Forearmed: Property Auctions and Risk Mitigating Strategies
Buying at auction means you are contractually bound to purchase at the time your offer is accepted. Carrying out your due diligence is fundamental to ensure that you do not commit yourself to a property purchase that is not suitable for your needs, or that you will have a hard time tenanting.
In an auction sale, the seller’s solicitor will prepare a sales pack which will be made available to bidders prior to the auction. Taking legal advice on the contents of auction packs is essential to ensure that as a prospective bidder you make informed choices on the level of risk that you are prepared to shoulder and the amount you should bid. It can allow further investigations and negotiations to be carried out, where appropriate. Some sellers may be prepared to sell pre-auction if an acceptable offer is made in advance.
There are bargains to be had at auction, but hidden surprises can be found that make seemingly straightforward transactions unattractive, which would have substantial financial implications for you as a potential buyer. Auctions can attract un-mortgageable, legally defective, or otherwise hard-to-sell properties. Properties are in auction for a reason – your (and our) job is in part to find the reason! “Good” reasons include executor sales where the seller is deceased, charity sales to ensure that best value is obtained, or a key tenant’s lease being close to expiry and at risk of non-renewal. Some “bad“ reasons are in the pitfalls list below.
Remember! Once the hammer goes down, you are tied to the purchase of the property, and risk losing your deposit if you decide to withdraw, as well as incurring potential penalty costs, and becoming liable for any damage to the property.
- The sales contract may contain specific additional conditions, such as, overage/additional payment clauses, shorter completion periods, and additional buyer premiums or costs contribution clauses, which you should understand and carefully consider. The special auction conditions that the seller will produce may well be written to suit themselves, and the earlier you involve a lawyer in the process, the greater the chance that their terms can be re-drawn pre-auction or at least the disadvantages fully understood.
- Disclosed searches may be out-of-date or may reveal issues which should be carefully assessed which may not be obvious to the untrained eye.
- The property may be in a poorer state of repair than is apparent, or may be described to include certain things, such as a parking space, when this is not the case. A survey is a great idea but you may not want to pay for one on such a speculative matter: it is a risk to weigh up. Look out for “money pit” issues like rising damp, dry rot, subsidence, or the over-enthusiastic amateur removal of internal structural walls. Recently wall-papered and re-painted properties may be literally papering over the cracks.
- If you are to redevelop, look out for planning permission to develop that relies on land lying outside of the seller’s title, or defective access rights. Maybe it is on sale because the developer cannot bank-fund the property and works?
- Other legal issues could arise from unhelpful informal agreements with existing tenants, bad payers, rent deposit breaches, the ongoing consequences of recent forfeiture of leases, lease break rights of key tenants, or short leases about to expire.
Strategies to mitigate risk
A misdescription in the auction catalogue can provide you with a remedy in law, but arguing this can result in expensive and time-consuming litigation. As a rule, be proactive and always protect yourself by taking responsibility for checking the property before the purchase is made.
- Instruct a solicitor. A lawyer will vet the auction pack prior to the date of the auction, any issues can be brought to your attention and you can decide whether to proceed to bid, carry out further investigations and negotiations with the seller, or withdraw.
- Instruct a surveyor. When buying at auction, you purchase the property in the state it is in at the date of auction, with any defects there may be. Hidden problems can prove very costly, so be aware and protect your interests by instructing a surveyor to inspect the property.
- Find out whether Planning Permission is required. Make sure you check whether or not you need planning permission for your proposed use of the property and factor this into your decision to bid or not. Study the property extent on any extant permission plans, and the conditions on the consent.
- Ensure that you have a clear financing plan. If you require finance to purchase the property and whatever works you want to do, make sure that your lender is satisfied that the property is going to provide good security before the auction, make sure you have the funds in place to pay the deposit straight away, and make sure you can pay the rest of the money within the specified time frame. If you do not meet these timescales, you’ll likely lose the property, your deposit, and potentially incur penalty costs. Arranging funding in the 4 weeks after hammer-fall is stressful and difficult: you may not get the best terms.
- Arrange appropriate insurance. Most auction contracts state that responsibility for the property passes on exchange of contracts to the buyer. Ensure you arrange buildings insurance before the auction, to go live promptly if you succeed.
- Gauge the market value of similar properties. Guide prices can be pitched low to get bidders into the (now often virtual) auction room; talk to people with local market knowledge for their views on what the property is worth. Remember, sometimes there are reasons why another person may want to buy a property which means they will pay more than its value, and you do not want to get into a bidding war with someone desperate to acquire the property at any price.
- Understand the auction process. Work out the maximum you are prepared to pay and stick to it. Visit other auctions before you decide to bid on property and understand the dynamics and speed of the auction process so that you are ready for your own attempt to buy. Make sure you check that the property you are interested has not been sold or withdrawn prior to the auction, and at the auction itself, check the addendum sheet to see if any amendments or additions have been made to the legal pack and what impact this may have on the property and your bid. Other bidders’ lawyers may be asking questions of the seller too, which require the seller to disclose new matters on the day of the sale.
- Don’t always give up. If the property you wish to purchase does not meet its reserve price, you can always contact the seller after the auction and make a private offer.
- Carry out due diligence on each property you plan to bid on. Bidders may be tempted to bid for several properties to keep their options open. However, the more properties you intend to bid on, the less likely you are to have undertaken the relevant due diligence. Focus on bidding on the properties you have thoroughly vetted, and if you are outbid, don’t lose heart, with greater experience under your belt, it will be easier next time!
As exciting and fast-paced as purchasing property at auction can be, be aware that problems can prove very costly, and specialist advice will go a long way to protect your position. For successful bidders, the fall of the hammer is exhilarating, and your enthusiasm shouldn’t be dampened by nasty surprises. If you are planning to purchase property at auction, please contact our Real Estate team.