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Buying a Home at Auction | The Ultimate Guide
Buying a home at auction can be slightly intimidating. With property flippers and seasoned investors looking to pounce on bargain opportunities, it can feel a little daunting for first-time auction-buyers.
In this guide, we cover absolutely everything you need to know about buying a home at auction: from what to look for in a property, how to bid, how to finance your purchase, and much more.
What is an Auction Property?
For some, selling a house (or commercial building) isn’t about maximising the return, but about obtaining a sale as quickly as possible.
The traditional house sale process can take many months and even years to undertake, and even then there’s no guarantee that more profit can be made from the property than in a quick auction sale - so, many owners are keen to use the auction system.
This is good for both the seller and buyer. The seller gets the expediency they are after, while the buyer obtains a property for a price that’s usually under market value. It’s a win-win situation where both parties obtain what they are after.
Additionally, auctions offer an avenue to sell a property when it's not in a liveable condition. Homes in serious need of renovation can be extremely difficult to sell in a traditional marketplace, but are often fast sellers at auction, fetching strong returns for the seller without the need to invest further resources in the property to bring it up to a marketable standard.
Why do Properties End up in Auction?
There are multiple reasons why a property might become an auction sale rather than being presented in a traditional way. These include:
- Seller choice - As mentioned above, it may simply be that the seller is after a quick sale, choosing to take their chances at auction rather than go through the longer market sale process. Additionally, some sellers believe that selling at auction will bring a higher price due to the competitive nature of the environment.
- Property is repossessed - One key reason that properties end up in auction is because they have been repossessed when the previous owner was unable to meet their mortgage obligations. In these situations, the mortgage lender (now the property owner) is simply looking to recoup the debt balance and administrative costs of the mortgage and has no further need to improve the sale price. Here, expediency trumps sale price entirely.
- Previous owner has passed away - The death of the previous owner will turn ownership over to the heirs. If they have no desire to live in the property and would rather sell it quickly to realise the capital for inheritance, an auction provides an ideal opportunity.
- Unusual property - Buildings that are unsuitable for a traditional mortgage, such as those made of unusual materials, may find a better marketplace at an auction than elsewhere.
- Property is in significant need of repair - Homes that have fallen into disrepair and are in need of serious renovation are often easier to sell in auction than in the traditional market.
- Anonymity or legal issues - In some cases, the seller is looking to remain anonymous or there are some legal complications regarding the property that the seller has neither the desire nor the resources to resolve (for example, boundary disputes). An auction provides an opportunity to sell the property while avoiding complications.
Advantages and Disadvantages of Buying a Property at Auction
Here are some quick pros and cons of buying a property at auction to give you an idea of whether it's a good idea for you:
PROS
- Opportunity to buy a property at a significant discount - There’s a great chance of getting a building below the market value, especially on the right day with little competition.
- Wide range of investment properties that need renovation - Homes in disrepair are very hard to sell on the traditional market and will appear at auctions for a quick easy sale, leading to extreme bargains.
- Fast turnaround - With completion in 28 days, it’s possible to go from a desire to find a property to getting the keys within a month.
- No chance of gazumping - Because the deal is binding at the point of sale, there’s no chance of another buyer outbidding you later.
- Accurate understanding of true property value - As auctions are transparent, you can see exactly what people are really willing to spend on the building, making the actual value much clearer.
CONS
- Riskier proposition due to speed of process - You have a very limited time to do due diligence, undertake surveys (at your expense), visit the property, and sort legal checks before the auction.
- Need for instant finance - You will need 10% of the value on the day, and have 28 days to find the rest, often meaning a mortgage is impossible and bridging finance is needed.
- No option to change your mind - The auction is legally binding; don’t bid if you’re unsure in any way.
- Potential for many unexpected surprises - Auction properties come as they are, so if you’re short on that due diligence, you may find unwanted surprises when you finally take possession, leading to expensive repairs or even legal disputes.
- Risk of enthusiastic overbidding - It’s very possible to get into it a little too much and pay too much out of the enthusiasm for the day, so determine your budget and stick to it!
The Auction Process
What actually happens at a property auction and how does it work? The process is both stunningly simple and understandably confusing for a newcomer.
In-Person or Online Auction?
One key change in recent years, primarily since the COVID-19 pandemic, is the move from in-person auctions to online auctions.
Actual in-person auctions where you turn up and sit in a room with an auctioneer holding a hammer are few and far between; however, a streamed auction has the same traditional process, just via video conference software.
For that reason, this guide has been developed assuming an online or streaming auction, however, the method for viewing, registering and paying is similar should you visit an in-person event.
Looking at a Property
Once you have found an auction house with the property (or properties) you are interested in, you contact them to show interest and arrange a viewing - just like with a standard estate agent. Auction viewings, however, tend to be in a much shorter timeframe with less flexibility than many traditional viewings.
Registering for the Auction
Should you want to continue and plan to bid, the next step is to register for the auction. This involves providing identity documentation and proof of funds to follow through should you make the successful bid. In some cases there may also be a fee, which is often refunded if you are not the successful bidder.
The Auction Itself
Make sure you have a stable internet connection and can do the rest in whatever environment you’re happy with. Think of an online auction as being very similar to eBay.
Bids are then taken until the property is sold.
If you win the bid, you will be expected to pay the deposit (usually 10%) immediately. The remainder is due within 28 days. Congratulations!
Seeing an Auction
You do not need to be a bidder to attend an auction. In fact, watching a few streaming auctions before you take the plunge to do it properly is a valuable experience. There’s no need to preregister, simply find an auction house streaming event and join on the day.
Paying for an Auction Property
Unless you have the cash ready for the entire property purchase at your disposal, you are going to need to fund all or part of your auction property purchase with debt-based solutions.
At Clifton Private Finance, we have the expertise needed for you to fund your auction property purchase, with specialists in every stage of the funding process.
Contact us to speak to a personal advisor who can discuss your specific needs.
Here are the 3 stages you'll need to consider financially:
Money Stage 1 - Upfront Capital
Prior to the auction you need to know that you have the capital in place to cover the deposit and any fees that are part of the process.
Consider:
- Registration fees: Many online auctions don’t have a registration fee, but will just need you to provide identification documentation and proof of funds as part of the registration process. However, some auction houses do charge an additional fee for registration.
- Auction house administration fee: The auction house’s fee is charged only to the winning bidder and covers their administration. This can range between a couple of hundred pounds and £1500 depending on the auction house.
- Buyers premium: In addition to the administration fee, some auction houses have an additional ‘buyers premium’ that may be between 2% and 5% of the final property sale cost. Typically this is 10% of the cost of the property, plus auction fees.
- Legal fees: Just as you will need to cover the legal costs in a traditional property purchase, the same is true with an auction. This can involve the cost of preparing legal documents for the property, search fees, and your solicitor’s fees. Expect to need between £800 and £2,500 to cover these assorted costs.
- The deposit: You will need to have 10% of the final price ready as soon as the hammer drops to pay the deposit on the property.
The auction house has no consideration for where the funds for this upfront capital comes from, so you are free to use whatever financing you can obtain.
However, be aware that putting a strain on your monthly debt obligations will make obtaining a mortgage to cover the full cost of the property a lot harder.
Mortgage stress test and debt service coverage ratio are key factors in obtaining the full financing for an auction property purchase and are determined based on the ratio between your income and the total of debt payments that must be made each month.
Speak to a finance specialist at Clifton Private Finance to discuss your initial capital funding options to see the viability and ongoing effect of each option.
Money Stage 2 - Mortgage or Auction Bridging Finance
When you win a property at auction and have paid the initial deposit, you have 28 days to pay the remaining 90% of the property costs.
If you plan to use a mortgage to cover that cost, it is essential that you have an agreement in principle (AIP) or mortgage in principle before you take part in the auction.
Not only that, but lenders are often unwilling to secure mortgages to unusual properties or those in a state of disrepair, making many auction bargains unsuitable assets for collateral.
Bridging finance provides the answer for those unable to secure a suitable mortgage.
A specialist finance product designed to provide the needed funds for the interim stages while other finance options are secured, bridging loans provide the perfect answer for auction finance needs. Specialist auction finance loans are tailored bridging loans for this exact purpose.
Bridging loans tend to have higher interest rates than other relevant finance, thus they are suitable only for short-term use.
An exit strategy, whereby the plan for clearing the bridging finance in the near future is fully defined, is an essential part of obtaining bridging and auction finance.
In most circumstances, that exit strategy is either:
- To replace the bridging loan with a mortgage.
- To swiftly renovate the property and sell it on.
Clifton Private Finance are experts in the bridging and auction finance arena. Speak to us today to discuss the mortgage and bridging loan options and get an in-depth understanding of how a bridging loan can open up opportunities for you.
Money Stage 3 - Converting Bridging Finance to a Mortgage
As mentioned, the exit strategy for many auction bridging loans is to replace it with a mortgage as soon as possible. This could be because:
- A mortgage wasn’t able to be obtained and put in place quickly enough, but the process will complete within a reasonable time, replacing the bridging loan.
- The property needed renovation before it was fit for habitation and a mortgage lender could secure the loan with the building as collateral.
- The property is of a specialist type or location and a specialist mortgage was needed. This type of niche mortgage would have taken even longer to secure, with additional paperwork and consideration and the bridging finance is used while this process was undertaken.
- The property was planned to be ‘flipped’ (meaning to renovate and sell on for profit) but a change of circumstance has occurred and now the property is to be kept and a mortgage is sought to clear the bridging finance.
The process for obtaining a mortgage to replace as an exit strategy for the bridging finance is similar to obtaining a standard mortgage. In fact, in many cases where it is well planned, the mortgage application can begin as soon as the auction property is obtained and the bridging finance is in place.
It is important, therefore, to be confident in the success of a mortgage application and the full lifecycle of auction funding before taking the first steps - putting a deposit down on an auction property in a rush of enthusiastic risk taking with the belief that it will ‘all work out in the end’ can be an extremely costly mistake!
It is essential that you speak to experienced auction funding specialists with a comprehensive knowledge of every step of the funding journey before you apply for a mortgage.
At Clifton Private Finance, we have the expertise you need. Contact us today to explore the spread of funding products available to help.
Commercial Property at Auction
Auction properties are not limited to residential homes, and a lot of commercial property, from office space to factories, regularly comes up for auction.
The process for purchasing commercial property for auction is identical to that for residential property, though it is essential that you understand what you are bidding on and build a proper business use-case to research and identify that it is the right investment for your company.
Make sure that you undertake the necessary research to ensure that you are bidding on a property that can actually be used for the purpose you intend.
Renovating and Flipping Property
If you want to build a successful business (or side hustle) flipping property, then buying at auctions is essential. It is here you will find the best bargains and the widest range of options for property that needs a little love to make it homely (and profitable!).
Developing and flipping a property successfuly can be done with the right level of care, understanding of the market, and funding support.
At Clifton Private Finance, we can offer the range of finance products that you will need to be successful in this exciting venture, from the bridging finance and portfolio mortgage that forms the core of the funding, through to additional asset-based leverage to fund the renovation materials, tools, and work that makes it all possible.
Contact us and discuss your plans for auction property purchases and renovations and let us help you build a successful enterprise.
Buying a Property at Auction - 5 Steps
For a clear step-by-step guide to how to buy a property at auction, look no further:
Finding an Auction
Finding an auction is easy, with a quick internet search producing many results. Look to established estate agent and property auction companies such as Savills and Allsop, and growing online auction houses like the UK-wide Auction House.
Remember, there are three types of property auction:
- In-person - Now a minority and a bit of a rarity, in-person auctions give you the opportunity to watch and learn from experience auction users.
- Streamed - Replacing the in-person auction, streamed auctions work in an identical way to the traditional auction but have a live video interface replacing the in-person aspect. Ensure you have a stable internet connection before joining.
- Online - With timed auctions that may stretch for two to three days, online auctions provide a near-effortless way to purchase property from the comfort of your home.
Preparation
Never forget you are buying a property! You will want to put the same due diligence into your auction property purchase as you would if buying a home in a traditional estate agent led setting.
Through the auction house, you can enquire about viewings, arrange for your surveyor to undertake a full evaluation, and discuss the legal aspects and any notable information.
Many auction houses have a detailed catalogue that lists all the properties that form the portfolio for the auction, while others utilise familiar website user interfaces to list and display the lots.
Ensure you have your finances in order, set a budget, and give yourself as much time as possible to get as much due diligence done as possible.
Registering
Registering can be filled in online, often in two stages.
The first stage makes up your personal ID information and includes:
- Proof of identity (passport, driving licence, etc.)
- Proof of address (council tax bill, mortgage statement, utility bill, etc.)
- Solicitors details
The second stage which tends to be done closer to the auction time includes the Source of Funds (SoF) checks which may be:
- Agreement in principle or lending agreement (for mortgage or bridging finance)
- Bank statements showing the deposit amount (if using finance)
- Bank statements showing the full capital for the purchase (if not using finance)
In addition, you will need to prove the legal providence of the funds; this may require one of the following:
- Additional bank statements to show the build up of funds over time
- Proof of previous property sale
- Letter from person gifting money
- Evidence of money left in a will
- Receipt of shares being sold
Once you are registered you will be able to join and bid on the selected auction. Auctions at a later date may require a new second stage Source of Funds check.
Bidding and Winning
Bidding can be done online in almost all examples, or over the phone with streaming and in-person auctions. The methods and interfaces for these interactions are friendly and clear.
Remember that your bidding is an obligation and you will have to follow through with your purchase if you win the auction. Backing out will be costly and involve a direct conversation with the auctioneer, whom you should contact as soon as possible if you have made any sort of mistake.
And if you win… congratulations!
Completing
After winning the auction, you typically have 28 days to complete the purchase. Your solicitor will handle the final legal work, and your mortgage lender or bridging loan provider will arrange the funds.
Remember, it is essential that your mortgage is ready for use as delays beyond 28 days could result in you losing your deposit and the property.
If there are any problems with your mortgage in the interim, contact Clifton Private Finance to discuss bridging options straight away.
How We Can Help
Buying a property at auction is exciting. With the huge range of homes that can be obtained, often at bargain prices, it can prove an extremely profitable way to purchase property.
With large sums of money changing hands though, it’s essential that you have professionals you trust at your back - we at Clifton Private Finance are here for you.
Contact us today to discuss any further questions you have about auction property finance, from specialist auction bridging loans, to just getting a traditional mortgage fast enough to make it work. We have the specialist knowledge you need to make your auction experience a smooth and cost-effective way to property ownership.
