Auction rooms may once have been the domain of professional property developers and landlords, but increasing numbers of ordinary residential buyers who have spotted the potential for a bargain are turning to auctions as a way of getting a foot on the housing ladder.
For advisers, this opens up a world of opportunity to guide consumers through a buying process that can be littered with pitfalls for the inexperienced buyer.
A good IFA or mortgage broker who can help clients negotiate the auction maze is worth their weight in gold.
Figures from the Royal Institution of Chartered Surveyors (RICS) show that there were 7,732 properties auctioned during Q4 2007 and research from Standard Life Bank shows an appetite for auction buying, with 40 per cent of consumers saying that they would consider buying a property in this way.
With RICS also forecasting that repossessions will rise by 50 per cent during 2008, the UK’s auction houses are primed to be busier than ever. This means huge potential for bargain hunting buyers and auction savvy advisers who can tap into and take advantage of this trend.
Homes that have been repossessed often end up at auction, alongside long-term empty homes, old local authority properties, and residential homes where sellers just want a quick, agent-free sale.
For potential auction buyers there are savings to be made. 98 per cent of people questioned by Standard Life Bank say they expect to save money by buying at auction. An optimistic 9 per cent anticipate getting more than 30 per cent off the market value of the property, while half anticipate a saving of between a third and 10 per cent off.
Many people choose to buy a property at auction because they can see the long-term value that can be added by developing. These people will be looking to IFAs to recommend finance options for redevelopment and home improvement projects.
A key role
For advisers, the role in providing guidance for customers interested in buying at auction is key, as the process can be a minefield for buyers who haven’t done their homework.
Many consumers don’t realise that there are strict rules in place for properties bought at auction: when a bid is successful, 10 per cent of the cost has to be paid before leaving the auction, and the balance has to be paid in full within 28 days.
Bringing clients up to speed with the practical implications of buying at auction will make the process smoother, and actually ensure that the client is borrowing enough money and has considered all the costs involved.
It is essential that buyers have their financial houses in order before they start the mortgage buying process. Many consumers simply are not clued up when it comes to the financial obligations of auction buying, with 26 per cent saying they wouldn’t have a deposit arranged and just half saying they would have their mortgage organised in advance.
One of the key attractions of buying at auction is the speed of completion. Contracts are exchanged on the spot and the deal is complete within a month, so advisers need to be prepared to help secure those funds as soon as possible for their clients.
In order to ensure clients are fully aware of the budget they need, it is worth doing a factfind session to find out how much they understand about the fees, deposit, premiums and Stamp Duty they may need to pay on top of the purchase price.
Finance options are varied, with advisers being able to recommend a variety of residential and buy-to-let mortgages, pre-auction mortgages and bridging loans.
An important issue to remember, however, is that if an over-zealous buyer bids over the market value of the property, they may not get a mortgage for the full amount, and once their bid is accepted they are legally committed to complete the purchase.
With no estate agent in the mix to guide the buying process, the IFA role of assisting the customer has to be as much about making the practicalities clear, as it is about getting their finances in order.
Top tips
We have put together five tips that advisers can pass on to their clients to help them avoid the pitfalls of auction buying and to ensure they get the most out of the process:
Do some homework
Know what you are buying before you buy it. Get hold of a copy of the auction catalogue featuring the property you want to buy and visit the area so you understand the market and location of the property.
Understand how an auction works
A reserve price is usually placed on every property that is auctioned, and if it doesn’t reach this price the property will not be sold.
So as long as the reserve price has been reached, the person with the highest bid when the auctioneer’s hammer falls is the successful buyer. It also means they are legally committed to paying the price they bid.
The buyer will need to pay 10 per cent of the cost of the property before they leave the auction, and the balance has to be paid in full within 28 days. Having the mortgage approved in advance is absolutely key.
Know the ‘hidden’ costs
Be aware of all the costs involved when buying at auction, not just the cost of surveys, legal advice and Stamp Duty.
The auctioneer may demand a ‘buyer’s premium’, equivalent to 1.5 per cent of the sale price. Usually there is an administration fee, typically £150, paid to the auctioneer.
This should all be taken into account when working out how to borrow. If not fully understood, it’s easy to see how these costs may not be budgeted for and can cause problems down the line.
Set a price limit
Probably the most important rule of buying at auction to set a price limit before the auction and stick to it. If the bidding goes above the price you are prepared to pay, walk away – don’t be tempted to get caught in the moment.
Remember that the amount you pay for the property may not be reflective of its real value and may not match the amount of money a mortgage lender would be prepared to lend you. Consult with your adviser on this crucial piece of information.
Keep your head
If you can hold your nerve, try not to bid until the final count. This is a simple rule but can prove very effective, ‘going once, going twice’ – then start bidding but only if it’s below your pre-set maximum bidding price.
The money matters
Once the hammer falls on your bid, you are committed to pay for it. Speak to your adviser about getting a mortgage that offers a staged release of funds. Your lender needs to be aware upfront that this is an auction property – the more they know in advance, the better.
Clearly the role for an adviser whose client has decided to buy at auction is extensive. From ensuring your client knows the practical implications and costs of the buying process to helping them secure their finance in a timely fashion, there are many key steps in the auction buying process.
But above all, if your client doesn’t get the property they want, they shouldn’t give up. The best thing about auctions is that there is always another one around the corner, meaning that your client will have plenty of opportunities to buy and will need a good adviser on side to help them through the process.
