An increasing number of properties are being sold at auctions up and down the country as more people are becoming aware of the opportunity to acquire property at what many consider to be below market prices. In this blog, partner Sam Rosenthal examines the risks involved for buyers who are considering buying at auction.
Once the auction takes place, and the memorandum of auction is signed and dated, a binding contract has been exchanged.
From a seller’s point of view, selling at auction provides certainty and speed. The majority of auction sales require completion within 20 working days of the auction date. As a seller, if you are looking for a relatively quick sale, this method provides that. However, the price you achieve at auction sale may be up to around 20% less than the price you would achieve on the open market in a non-auction sale.
A buyer would be happy to buy at auction if can they pay up to 20% below the market value. However, like with many things in life, there are disadvantages. One is that a buyer has to comply with a strict deadline for completion, usually within 20 working days. For many buyers, especially those buying with the help of a mortgage or having something to sell at the same time, this is not feasible.
Buying at auction is not for everyone. It is not usually suitable for people who have a property to sell and need to release funds from their sale to assist with the purchase. Nor does it usually suit those buying with a mortgage. It is highly unlikely they will be able to comply with the strict auction deadline for completion, and in that time sell their property and arrange a mortgage.
Pitfalls of buying at auction
There are many other potential pitfalls. A potential buyer at an auction should ask themselves why the property is being sold at auction. There are many possible reasons, including:
a) The property has been repossessed, and the lender wants a quick sale.
b) The property is owned by a council or housing associations that is looking to sell off some property.
c) The seller is a developer or property trader who is looking for a quick return on their investment and is not interested in holding the property for long.
Other reasons for an auction sale
There may be other reasons why a property is being sold at auction, and this is where the danger lies from a buyer’s perspective. Many properties are sold in this manner because the seller knows that it may not sell or may take a long time to sell because, for example:
a) It has major structural problems.
b) It has Japanese Knotweed.
c) It is potentially unmortgageable and or may be difficult to sell for a specific reason.
d) There are difficult occupiers or tenants in place, or problematic or missing tenancy agreements/arrangements.
e) There are title or boundary issues.
f) There are nearby developments that are likely to affect the value of the property.
For the above reasons, a seller may look for a quick sale. They will know that by selling at auction, they will not have to provide as much information or have to deal with difficult enquiries from a buyer’s solicitor.
It is imperative that anyone buying at auction considers carefully both the seller’s particulars and the legal documents provided. Each lot at auction will have a legal pack. This can usually be downloaded from the auction website and will contain title documents, searches, other ancillary documents and replies to enquiries.
Once the auction takes place, and the memorandum of auction is signed and dated, a binding contract has been exchanged. The buyer is committed to the purchase. The memorandum of exchange will refer to any special conditions, and the buyer is bound by those conditions. If the buyer has not considered carefully any special conditions, they are nevertheless bound by them and could find themselves with issues either pre-completion or post-completion.
The special conditions the buyer should look out for include:
a) Additional payments such as “buyer’s premiums”, which are payable in addition to the purchase price and can be as much as 1-3% of the purchase price,
b) Surveyor’s/search costs, which require the buyer to contribute to the seller’s fees,
c) Conditions relating to occupiers or items left on the property. The special conditions may say that the property is being sold subject to any occupiers residing at the property, and subject to any tenancy agreements that may or may not exist. Or, they may say that the property is being sold as seen, which means the property is being sold with any occupiers/tenants in place, or that the property is full of refuse or items of furniture and these will be left for the buyer to clear on completion.
In addition, I recently came across an example of a property being sold by a local authority, which included a provision that said: “The purchaser must by written notice serve upon the vendor within 5 working days of the contract a notice to certify that they intend to use the property as their only or principal home.”
This is an example of a local authority trying to restrict the sale to an owner/occupier and stop the property falling into the hands of a buy-to-let landlord.
I have also seen examples of properties that have a short lease and the special conditions will say something along the lines of:
“The seller has agreed to purchase a new lease from the freeholder for ‘X’ amount, and the seller shall use reasonable endeavours to complete the lease extension on or before completion. In the event that the seller shall not be able to complete the lease extension prior to completion, the buyer will be able to complete the lease extension post completion.”
However, on looking through the auction pack, it was clear that negotiations for the lease extension were on an informal basis and the necessary formal notice had not been served. This meant the landlord was under no obligation to complete the lease extension with the buyer post completion. It was completely up in the air whether the buyer was buying a flat with a short lease or one with a long lease. There was no assurance that if the lease extension was not completed prior to completion, the buyer would be able to complete it post completion.
In addition to the legal issues, the buyer should view the property and instruct a valuer or surveyor to advise whether there are any structural or other issues. The buyer should also carry out relevant research so that they are aware of any issues there may be with the property.
Buyers must realise that information provided by the seller will be limited. Many times, when you look at auction packs, they are incomplete and missing the searches, title documents or standard replies to enquiry forms you would normally receive on a purchase.
It is, therefore, imperative that anyone considering buying a property at auction should download the full auction pack, including any legal documents, prior to the auction. They should have these reviewed by a solicitor who can advise them of any relevant issues. It is also vital that they have all their finance in place or have a plan as to how they will put it in place.
I would be happy to review any auction packs for anyone interested in buying a property at auction. Please contact me by email at [email protected].