Buying a property at auction can be an exciting opportunity. The speed of the process, the possibility of finding a property at an attractive price and the wide variety of properties available can make auctions appealing to both investors and first-time buyers. However, auction buying also comes with risks, particularly when buyers misunderstand who is
responsible for checking the property and its legal position.
One common misconception is:
“The auctioneer will tell me if there’s a problem.”
The reality is very different.
The fact:
You need to conduct your own due diligence.
An auctioneer is responsible for conducting the auction and marketing the property. While the auction listing and information provided may give you useful details about the property, you should not assume that the auctioneer has carried out all the investigations necessary to protect you as a buyer. As the prospective purchaser, you need to carry out your own due diligence before bidding. This means taking the time to understand exactly what you are buying, what legal obligations come with the property and whether there are any issues that could affect its value, use or future sale.
Why is due diligence so important?
At a traditional property sale, buyers often have an opportunity to make an offer, instruct a solicitor, carry out searches and negotiate before committing to the purchase.
Auction purchases can work differently.
Once the hammer falls and your bid is accepted, you may have entered into a legally binding contract. Depending on the auction terms, you may then have a short period in which to complete the purchase. This means that discovering a serious problem after the auction can be extremely costly. You may not simply be able to say, “I didn’t know about this, so I don’t want the property anymore.”
That is why your investigations need to happen before you bid.
Start with the legal pack
One of the most important documents for an auction buyer is the legal pack. The legal pack can contain important information about the property and the legal terms on which it is
being sold. Depending on the property, it may include documents such as the title information, searches, lease, tenancy agreements, property information, planning documents and the Special Conditions of Sale. However, simply downloading the legal pack is not the same as reviewing it.
Auction legal documents can contain technical legal language and important obligations that may be easy for an inexperienced buyer to overlook. A buyer might focus on the photographs, location, guide price and potential rental income while missing a clause that creates a significant additional cost or restriction.
What should you look for?
There is no single checklist that will apply to every auction property, because each property and legal pack is different. However, there are several areas buyers should pay particular attention to.
- Title issues – The legal title can reveal important information about the property, including ownership, restrictions, rights and covenants. You should understand what interest is actually being sold and whether there are any restrictions that could affect your plans for the property. For example, if you intend to renovate, extend, let or resell the property, restrictions affecting its use
could become particularly important. - Special Conditions of Sale – The Special Conditions deserve careful attention. These conditions can contain additional contractual obligations and costs that may not be obvious from the auction listing. For example, the buyer may be required to pay the seller’s legal costs, an administration fee, a contribution towards another expense or other sums in addition to the purchase price. This is why the guide price should never be treated as the total cost of purchasing the property.
- Leasehold properties – If you are buying a leasehold property, you should carefully examine the lease.
Important issues can include the remaining term of the lease, ground rent, service charges, restrictions on alterations, subletting provisions and any other obligations affecting the leaseholder.
A property may appear inexpensive at auction, but an undesirable lease or significant ongoing liabilities could affect whether it is actually a good investment. - Tenancies – If the property is being sold subject to a tenancy, understand the terms of that tenancy before bidding. You should establish who occupies the property, the nature of the tenancy, the rent being paid and whether there are any arrears or other issues. You should also establish whether vacant possession is being provided or whether you are purchasing the property with an occupier in place.
- Additional costs – Always calculate the total cost of acquisition, not just the winning bid. Potential costs can include auction fees, legal costs, Stamp Duty Land Tax where applicable, Land Registry fees, searches, mortgage costs, insurance, service charge liabilities and repair or renovation costs. A property that appears to be a bargain at £150,000 may look very different once all associated costs have been calculated.
What about the auctioneer?
This does not mean that information provided by the auctioneer is irrelevant. The auctioneer’s listing can be a useful starting point and may highlight important information about
the property. However, buyers should not rely solely on the auction listing or assume that the auctioneer will identify every legal, structural or financial issue. The responsibility for deciding whether the property is suitable for you ultimately requires your own investigations and professional advice. If something is unclear, ask questions and seek appropriate professional advice before bidding. Don’t confuse “guide price” with “market value.” Another important part of due diligence is understanding the difference between the auction guide
price and what the property may actually be worth.
A low guide price can attract attention and generate significant bidding activity. The final selling price may be considerably higher.
More importantly, the price you pay should be considered alongside the property’s condition, legal position, additional costs and potential future liabilities.
A property is not necessarily a bargain simply because the guide price looks attractive.
Have a bidding strategy
Once you have reviewed the available information, established the additional costs and assessed the risks, you can make a more informed decision about your maximum bid.
For example, rather than deciding that you are prepared to spend £200,000 on a property, calculate:
Purchase price + auction fees + legal costs + taxes + immediate works + other liabilities = total investment.
This allows you to determine what you can realistically afford. It also helps prevent the excitement of an auction from causing you to bid beyond your intended budget.
Don’t wait until the hammer falls.
The biggest lesson is simple – Due diligence should happen before you bid, not after you win.
Once the hammer falls, you may have very limited options if you discover an issue that you did not previously understand.
Taking the time to review the legal pack, investigate the property and obtain professional advice before bidding can help you make a much more informed decision. You may ultimately decide that the property is an excellent opportunity and proceed with confidence. Alternatively, your investigations may reveal an issue serious enough for you to reduce your maximum bid or walk away altogether.
Both outcomes are valuable.
Knowing when not to bid can be just as important as knowing when to bid.
The bottom line
The auctioneer may provide information about the property, but you should not rely on the
auctioneer to identify every problem for you.
Auction buying requires preparation, research and careful consideration. Before bidding, review the legal pack, read the Special Conditions of Sale, understand the property’s
legal position, investigate potential costs and consider whether the property is suitable for your intended use.
Most importantly, make sure you know what you are committing to before the hammer falls.
Don’t just bid. Be informed. Get your auction legal pack reviewed before you commit.
We help buyers identify potential legal risks, additional costs and important issues within the auction legal pack, so you can make a more informed decision before bidding.
Spot the risks before you bid