The auction house is a tried and tested arena for property transactions. Landlords and other property professionals use auctions to purchase a property below market value, often with refurbishment in mind, in order to then rent out or re-sell for a quick profit.
So how do property auctions work? Nowadays, there are two types: physical and online auctions, with the latter unsurprisingly gaining popularity during the Covid-19 pandemic and associated lockdowns.
The traditional, physical auction will be familiar to anyone who has seen an auction on television. The auctioneer will be taking bids from those actually in the room, as well as from those via telephone and proxy bids. The latter is where the bidder submits their maximum bid before the auction takes place and allows the auction house to automatically submit the bid.
By contrast, an online auction will usually take place over 30 days, during which time buyers are able to register and place their bids. Some auction houses will charge a participation fee, although this is in most cases refundable.
Auctions can be either unconditional auctions, where the exchange of contracts happens immediately after the auction ends, subject to the reserve being met, and completion is normally set for 28 days from this point. Alternatively, they can be conditional auctions, where a successful bidder has a little longer to exchange contracts and complete the purchase.
There is some consistency across both types of auctions. Firstly, those interested in bidding usually need to have registered their interest in advance. Secondly, preparation is key. Initially, the investor should obtain the catalogue from the auction house, which will generally be available a few weeks before the actual auction date. Each individual item for sale (or ‘lot’) will usually come with a guide price, which provides an indication of the price the seller expects to receive. However, this does not mean that the property will sell for this price; it could sell for more or less. In most cases where property is concerned, the seller will set a minimum reserve price, which the property cannot be sold for less than. Any minimum reserve price is typically less than the guide price.
The phrase caveat emptor (‘buyer beware’) is especially appropriate with auctions. While you can buy a property at auction without a survey, this is not advisable. A potential bidder should instruct a surveyor to carry out an independent valuation of the property and many surveyors are able to provide enhanced desktop valuations.
When the auction is completed, the highest bid wins and the bidder pays a reservation fee to secure the property. This is usually at least 2.5% of the purchase price, plus VAT. The minimum reservation fee is typically at least £5,000 and this is added to the overall cost of the property in calculating the Stamp Duty Land Tax (SDLT).
Auction finance, a form of bridging finance, is designed to meet the rigorous time scales involved with auctions. As purchases typically need to be made in full within 28 days of the hammer falling, this rules out regular mortgage finance. Auctions will also market unmortgageable and uninhabitable properties, which auction finance can be used to purchase.
At Alternative Bridging Corporation, we offer bridging loans which are ideal for fast and flexible finance solutions, such as funding auction purchases. In addition, our Alternative Overdraft provides a flexible loan facility from £250,000 that can be drawn upon whenever required, avoiding delays and set-up charges each time a loan is needed or the paying of interest when the facility is dormant. The loan term is up to 24 months and the maximum LTV is 70% for residential and commercial property.
The outlook for property investors may be uncertain, but auction purchases continue to provide opportunity to realise good returns, and with the right finance, investors can make the most of that opportunity.
