Buying a property at auction

A considerable number of investors purchase properties at auction. Most of these properties are generally sold at about 10-20% below normal market value if sold via an estate agent. The properties can be difficult to shift, purchasers may require a quick hassle free sale, or the properties may be for cash buyers only because of structural or other problems that make raising money from building societies problematical.

Because of the strong sellers market in the UK at present, some very desirable properties are sold at auction with the hope that bidding competition will drive the price up close to or even above the normal market price range – an example would be an old farm with outbuildings close to London with say 4 acres – something richer city dwellers might fight to get hold of if marketed correctly.

Some things to watch out for are whether the property has any structural defects, is in an area of rising crime or next to an expected new road or development. Ask the estate agent why it's being auctioned rather than sold in the normal process. Is there anything that looks suspicious about the property – if so, ask the estate agent questions about the issue?

If you bid for a property at an auction, you need to have finances lined up with a Building Society. There is a considerable amount of time and effort required to line this up, say, on five properties you might be interested in. If your bid “wins”, you will have to exchange contracts more or less straight away. You cannot legally pull out. Hence it is normal to get a survey of the property done before bidding, or at least to have some expert look at it to see if there are any fundamental problems that could make raising finance on it problematical.

As you can imagine, because it is impossible to do thorough due diligence on a number of properties and it is costly both in money and time, auctions are often attended by experienced investors who have large cash reserves. These investors may buy in cash, renovate, then mortgage with a company after say 6 months. Their cash reserves means they can handle the risk a lot better than an inexperienced private buyer with limited cash in the bank.

So my advice is, if you are new to property investment, best to buy from an estate agent. In time, you can learn about auctions, the pit-falls of the buying process and attend an auction as an observer to see how things are done.

As a rule, you should set yourself a “limit” to which you will bid to – be prepared to get out-bid. Best not to make the first bid, and keep the bidding at a slow pace when you bid against other people – this tactic might result in the price not quickly reaching giddy heights.

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