Buying Commercial or Residential properties at auction is becoming increasingly common, as investors and developers are attracted by the apparent bargains on offer.
However, there are many pitfalls for the unwary. At Key, we have seen many examples of properties purchased for which we are approached for finance after the successful bid was made, only for the client to discover that there are problems with the condition of the property which they hadn’t spotted. At auction, you have to pay 10% deposit on the day, and generally complete the purchase within four weeks! So here are some thoughts on how to help reduce the risks:-
1. Beware the auctioneers guide price. These “guides” usually look fantastic value for money. In reality, they are pitched low to get bidders into the audience, and bidding for property. Our understanding is that on average, actual sale prices at auction are roughly 140% of the guide price in the brochure;
2. Many “problem” properties are sold at auction. Either they are distress sales for speed of disposal, or sometimes they cannot be sold through the normal estate agency route as this allows people the time to spot the problems and withdraw from a sale before committing to the purchase. Some have structural problems, some may have onerous commitments and leases attached to them, and some may have weak or defective legal title.
3. It’s important to undertake as much research as possible on the property that you want to buy. Have it checked by professionals for structural integrity, and costs of remediation work if needed. Ask a friendly RIC’s valuer to give you an opinion on value – even a low cost “desk top” valuation can be of use and prevent expensive mistakes. Thoroughly vet the legal pack provided by the auction house and if any doubts exist, get it checked by a solicitor before you commit.
4. If you need finance, make sure that you know how this is going to be raised. Many mainstream lenders are not set up to go through the extended process of arranging a loan for you on the hope that you may be successful at auction. If you do not have established credit lines available, then visit a broker who can guide you through the options and obtain some indications of appetite for what you want to buy. You may need to use a short term property funder to make the initial acquisition – these funders are set up and ready to deal with such transactions. Some have displays and personnel at auctions. There are many available in the marketplace and you are better using a broker to ensure that the best advice and options are established for your needs.
5. Visit other auctions before you decide to bid on property. Understand the dynamics and speed of the auction process so that you are adjusted and ready for your own attempt to buy.
6. Establish a top price that you willing to pay for the property and stick to it. Sometimes there are reasons why another person may want to buy a property which means they will pay more than its value – eg. a tenant of a building where the freehold is being sold. You do not want to get into bidding over value where someone else is desperate to acquire the property
7. Be ready to pay the deposit on the day of the auction – usually 10%. Your bid is a legally committing contract, from which you cannot withdraw. You usually have to complete the purchase within 4 weeks, although sometimes a little more leeway might be allowed by negotiation with the auctioneer and perhaps the vendor. However, as already mentioned, you must have your finance and your solicitor lined up and ready for a quick completion.
In summary, get yourself prepared, and of course the finance is a key element. At Key Commercial Finance Solutions Ltd, we can provide expert advice for funding auction purchases and we will always be pleased to talk to you.