Buying a Property at Auction
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Buying a Property at Auction
Marcus Robinson is joined by Olly Hollis from auction partner Hollis Morgan to explain how buying a property at auction works.
How do property auctions work? What is the process?
Olly: It’s a very simple, black and white process – there is no grey area. For many people looking at auction properties the majority on the market may not be of interest.
Auction houses or auctioneers aim to filter the market and present a catalogue of “opportunities”, which can be investment or development opportunities, among others. The general process involves viewing properties, reviewing legal packs, organising finances, bidding on the property, and then collecting the keys.
What are the buyer’s fees?
Olly: This is a question we get a lot, which reflects how it’s sometimes not as transparent as it should be.
With Hollis Morgan it’s dead clear – there is a fixed buyer’s premium of £1,500 plus VAT for any lot size. However, it is crucial for potential buyers to review the legal pack and the contracts – different clients may add additional fees, such as contributions to legal packs or other various costs.
The fees can vary from lot to lot depending on the client and any additional charges they may include, so it is essential to look at the contract before bidding.
Do you have to pay Stamp Duty on a property purchased at an auction?
Marcus: You would be liable to pay Stamp Duty, just the same as with a normal purchase. This usually needs to be paid to HMRC within 30 days of the purchase. However, if a solicitor is involved, they will usually request these funds at completion, alongside any remaining deposit funds.
There are scenarios where a discount on Stamp Duty might be available, depending on the specific property and the buying circumstances. For example, discounts could apply if it’s a deceased estate, an uninhabitable property, or if the seller is relocating for work. For clarification on these potential discounts, it is advisable to consult a qualified tax advisor.
Olly: Generally, when buying a property, Stamp Duty is payable regardless of the purchase method.
What is the guide price vs. the reserve price?
Olly: Historically, guide prices and reserve prices in auctions were somewhat fluid, with guide prices potentially being set to generate maximum interest and reserves decided later.
However, with the involvement of the Advertising Standards Authority, there are now strict rules governing guide and reserve prices.
A guide price is essentially the minimum level the vendors are seeking, and this is the publicly advertised price. The reserve price, which is confidential, is set at no more than 10% above the guide price. This correlation allows buyers to estimate where the reserve might be set.
When and how is the deposit paid?
Olly: The deposit is paid upon the exchange of contracts. Typically, this deposit is 10% of the purchase price, although it can vary slightly.
The deposit is usually paid either through your solicitor, or directly into the auction house’s client accounts if you are exchanging contracts at their office.
Do you need a mortgage or finance in place to buy a property at auction?
Marcus: No, you do not need a mortgage or finance in place to buy a property at auction. However, we would always recommend you at least look into getting an Agreement in Principle (AIP), due to the timescales involved with auctions.
Many clients purchase properties at auction with cash and can actually refinance as soon as they have completed on the property. While some lenders may require a six-month ownership period before refinancing, many are willing to refinance a property on day one.
Completing a standard mortgage within the typical 28 or 56-day auction completion period can be tricky, as the average mortgage process can take anywhere from eight to twelve weeks, and unexpected issues can cause delays. Therefore, bridging finance is often the preferred option.
It is also strongly advised to have the legal pack reviewed. You can pay a solicitor a fixed fee to review the legal pack, and they may offer a deal for the full conveyancing if you proceed with the purchase.
How do I get finance or a mortgage to buy a property at auction?
Marcus: Securing finance or a mortgage for an auction property depends on the type of property, its intended use, and its condition. Obtaining a standard mortgage within the auction timeframe can be tricky – not impossible, but certainly harder. If the property is uninhabitable you wouldn’t be able to get a standard mortgage, so you would need bridging finance.
It is crucial to speak with a broker as early as possible to get the wheels in motion. The last thing you want is to get to the completion deadline and not have your finance in place, because you’re liable to lose your 10% deposit. A broker with experience and knowledge in auction property finance is vital.
At Mortgage Style, we have extensive experience and access to exclusive deals with lenders that are not available elsewhere, potentially saving clients money. We manage the entire process from application to completion and will chase all parties involved – surveyors, solicitors and sellers. We help the whole process run as smoothly as possible and take away that stress for the client.
Do you need an Agreement in Principle (AIP) to buy a property at auction?
Marcus: From our point of view, you don’t need an Agreement in Principle (AIP), though some auction houses might prefer to see evidence of what a buyer can borrow. However, it is highly advisable to have one, especially given the timescales of auctions. I certainly wouldn’t want to be buying a property and risking 10% of the purchase price if I don’t know I can get finance.
Bridging lenders often provide “indicative terms” rather than a formal AIP, outlining the potential loan amount, rate, fees, and term.
Olly: Regardless of the funding method, whether borrowing or using cash, as soon as you exchange contracts, you are committing to pay a 10% non-refundable deposit. More often than not you are committing to finding the rest of the money eight weeks later.
I cannot stress the importance of having that money ready and available – there are huge risks if you are unable to complete, which can include losing your deposit. If you’ve bought a property for £500,000, that’s a painful lesson to learn.
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Can I use bridging finance to buy a house at auction? What type of bridging loan will I need?
Marcus: Yes, bridging finance can be used to buy a property at auction.
A bridging loan is a short-term loan, typically lasting between 12 and 18 months, which allows you to buy a property faster than a standard mortgage allows. It also allows you to buy a property that you wouldn’t actually get a traditional mortgage on.
Bridging finance falls into two categories: regulated and unregulated.
- Regulated bridging loans are for properties where the buyer intends to live in the property in the future. These loans are covered by the Financial Conduct Authority and are limited to a maximum term of 12 months, with fewer lenders offering them.
- Unregulated bridging loans are for investment properties, such as those bought to be rented out or refurbished and sold. These loans typically offer longer terms, ranging from 12 to 24 months, and there are generally more options available from lenders.
- There are also products known as “auction bridges” designed to speed up the process even further. These can involve automated valuations (AVMs) on the property, which removes the need to wait for a surveyor to visit and report, as the valuation is done via computer.
- Additionally, auction bridges may allow for indemnity policies to speed up the legal aspects of the transaction. A broker can advise on the most suitable bridging loan route based on the individual scenario.
What happens after I’ve bought the property at an auction?
Olly: From an administrative point of view, it is hoped that the buyer is already in contact with their solicitor, who has reviewed the legal pack. If not, this process needs to begin quickly, as eight weeks later, you will need to produce the money required.
Marcus: It is recommended that as soon as a property is won at auction, the buyer contacts a broker. This gets the wheels in motion to get the finance sorted.
We would get a full application in as soon as possible, converting any indicative terms into a formal application. This stage involves full underwriting of the case, potentially a physical survey if required by the lender, and the execution of the legal work.
Here at Mortgage Style, we can manage the entire application process, liaise with clients, and chase all involved parties (surveyors, lenders, solicitors).
How does the remortgage process work?
Marcus: A lot of people buy a property at auction, do some work to the property and then sell (known as “flipping”). In other cases, people may buy a property and hold onto this – for example, completing some renovations to then rent out the property.
If intending to hold on to a property bought at auction, we would be researching exit strategies for the client before the buying stage. This is because bridging loans have higher interest rates than standard mortgages, and having a clear exit plan from the start is essential to avoid being stuck on the bridge.
If the property renovations are not completed by the end of the bridging loan term, a “bridging a bridge” scenario is possible – this is a remortgage to another bridging lender. If the works are finished, the process of applying for a standard mortgage can begin a couple of weeks before the property is fully ready for completion.
What if I have bad credit? Can I still get a mortgage or finance to buy a property at auction?
Marcus: It is possible to obtain a mortgage or finance to buy a property at auction even with a history of bad credit.
For a standard mortgage, it can be more challenging because you’ve got to make monthly payments, and lenders need to know you can afford to make those monthly payments.
With a bridging loan, the way it commonly works is that the monthly payments are rolled up onto the loan – you’re not physically making monthly payments. This means lenders are more flexible when it comes to adverse credit.
The mortgage is a bit trickier, but there are still lenders out there. So it’s all down to how severe the bad credit is.
How can a mortgage broker help? Anything else to add?
Marcus: A mortgage broker can get involved at an earlier stage, especially with bridging, to assess a property a client is considering buying and offer advice on whether they should bid on it. By sending the property details to a broker, they can reach out to lenders and surveyors to determine if the property is mortgageable or if a bridge could be obtained.
It’s worth noting that some properties might not even qualify for a bridge. While not many, there could be properties that no one will lend on. Brokers can provide advice on all of these aspects, potentially saving clients money.
We do charge fees as a brokerage, but clients are not committed to those fees unless they want to proceed with the advice we’re giving. We do all the research, ready for them to go to the auction. They may bid on a property and not get it – we’re not going to charge them unless they go ahead with something.
At Mortgage Style, we’ve built our business on strong communication and customer service – we know how important it is to keep in touch with clients. The worst thing is to not hear anything and wonder if something’s gone wrong – so we will keep our clients up to speed.
Olly: As the buyer, look at an auction as a tool. We’ll do all the hard work – we’ll filter out all the properties that are of no interest to you.
We can provide you with an easy and convenient catalogue of opportunities. Investment opportunities, development opportunities – pretty much anything along those lines – you’ll find in an auction catalogue.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP TO DATE WITH YOUR MORTGAGE REPAYMENTS.
There may be a fee for mortgage advice. The precise amount of the fee will depend on your circumstances and will be discussed and agreed with you at the earliest opportunity. Typically, in most cases, our fee will be £495. We charge £595 for bridging and adverse credit cases.
Mortgage Style is an appointed representative of HLPartnership Limited, which is authorised and regulated by the Financial Conduct Authority to provide mortgage advice. Mortgage Style offers regulated mortgages and bridging loans for residential properties. For any unregulated bridging enquiries, we will introduce clients to our sister company Brunel Bridging, which is a full member of the National Association of Commercial Finance Brokers (NACFB).
HLPartnership Limited nor Mortgage Style are not responsible for any advice you receive from Brunel Bridging Limited.