Purchasing a property at auction offers a fast-track route to securing a deal, often at attractive prices. However, auctions are not without risks – many seemingly desirable properties may have underlying legal or structural issues. Once the auctioneer’s hammer falls, the successful bidder is legally committed to completing the purchase, leaving little-to-no room for renegotiation.
To avoid costly mistakes, it is essential to conduct thorough due diligence before placing a bid, preferably with legal assistance. This article provides guidance to help buyers navigate the auction process and steer clear of common pitfalls.
Unlike traditional property purchases, an auction purchase results in an immediate legally binding contract. The moment the hammer falls:
• The successful bidder must pay a deposit, typically 10% of the purchase price, on the day of the auction.
• The buyer commits to completing the transaction within a fixed timeframe, typically 28 days.
• If the buyer fails to complete the transaction within the fixed timeframe, they risk losing their deposit and potentially facing legal action for breach of contract.
As auction properties are generally sold as seen, buyers have limited recourse if legal or structural issues emerge after exchange of contracts. This makes pre-auction due diligence essential.
Auction houses provide a legal pack for each property, which is typically available online before the auction date. This pack contains critical information about the property’s legal status, including:
• Title deeds – this confirms the legal ownership and highlights any restrictions or encumbrances.
• Search results – local authority, environmental and water searches may reveal planning restrictions, environmental liabilities and details about water and sewerage assets serving the property.
• Special conditions of sale – these may impose additional costs or obligations on the buyer.
Engaging a property lawyer well in advance to review the legal pack can help identify potential issues before bidding, preventing unexpected issues post-completion.
Auction sales usually require completion within a short period of time, which can create challenges for buyers relying on third party funding. Some lenders may require additional searches which are not included in the auction pack or a full structural survey. If long-term mortgage approval is uncertain, buyers may need to explore bridging finance or ensure they have sufficient cash before completion. Therefore, although financing an auction property is possible, the process is significantly more complex than a conventional purchase, making it important to seek professional advice as early as possible.
Common Pitfalls to Avoid
1. Overlooking Additional Costs - Some auction contracts include special conditions requiring the buyer to reimburse the seller for:
• Seller’s legal fees;
• Cost of property searches;
• Auctioneer’s fees.
These expenses can substantially increase the total price you pay and should be factored into budgeting.
2. Assuming the Property is Eligible for a Mortgage - Not all properties qualify for standard mortgage lending. Some common reasons why a lender may refuse financing include structural issues with the property, short lease terms and defective or missing legal documents.
3. Failing to identify Title Restrictions - It is not uncommon for auction properties to come with title restrictions or covenants which may affect how the buyer intends to use the property. Common restrictions and covenants include:
• Restrictive covenants – titles containing clauses preventing certain uses, such as running a business from the property or making structural alterations.
• Access rights – the property may not have direct access to a public highway, requiring a legal right of way. Similarly, the property may be subject to rights of ways afforded to third parties.
• Planning constraints – if the property has been altered without planning permission, the local authority could take enforcement action.
Failing to identify these restrictions could leave buyers with a property they cannot use for their intended purpose or struggle to release their equity from the property in the future.
• Engage a solicitor early to review the auction pack and report to you on their findings. This will allow you to uncover any potential risks and assist you in making an informed decision before deciding how much to bid.
• Secure financing ahead of time to ensure that your mortgage approval or alternative funding is secured before the auction. This will lower the risk of you being unable to fund the purchase within the tight timeframe and prevent the risk of losing the deposit.
• Monitor the legal auction pack for updates and sign up to notifications. This will ensure that all changes in the auction pack are taken into consideration.
• Set a strict bidding limit to avoid getting caught up in a bidding war.
• Be aware of additional costs before setting a bidding limit.
