In an uncertain property market more and more people are considering putting properties on the market at auction. The auction process provides certainty and a set timeframe and for many, makes it easier to plan. However, what are the risks of buying or selling at auction and what can be done to reduce these risks?
Buying at auction is not without risk as there can often be a reason why the property has not been sold on the open market, be it the state of repair, access issues or the presence of asbestos. It is not always possible to carry out a full due diligence exercise and there is a lot of time pressure to complete the transaction. However, the speed at which you are expected to proceed can be reflected in the guide price and the purchase price achieved.
Mitigate the risk if you are buying:
- Visit the property and if possible commission a survey. There are a lot of practical points that can be identified from a physical inspection that are harder to identity from paperwork. A physical inspection can reveal issues with the state of repair and other points such as rights of way or even issues with neighbouring properties that could impact upon the intended use. It is worth spending a bit of time and money at the outset to reduce the risk of nasty surprises further down the line!
- Carry out as much due diligence as possible. Depending on the circumstances of sale there may be limited information available within the auction pack but if this is the case this risk is often reflected in the guide price. In particular a review of the documents could identify issues with rent arrears, planning permission, Energy Performance Certificates, restrictive covenants, access or structural concerns. Any problems discovered after the auction are unlikely to be the responsibility of the seller to rectify.
- As well as considering the deeds and documents that have been provided, consider what information has not been provided and what the reasons for this might be. A solicitor would be able to flag up anything that they would normally expect to see.
- Make sure you are lined up to finance the purchase if you are successful at auction. Under the terms of the Common Auction Conditions you are required to pay the deposit at the time of a successful bid. If you subsequently fail to pay the balance due the seller may, at any time after completion date, serve you with a ‘notice to complete’ which will allow them to retain the deposit, recover the remainder of the purchase price, claim damages for breach of contract and relist the property and sell elsewhere. You do not want to be out of pocket for all of this!
- Try to avoid the requirement for lender financing. The usual period of 28 days between the auction and completion is not long and does not provide much time to deal with lender requirements and so there is the risk that finance will not be forthcoming. If you are going down the financing route it would be advisable to ensure there is an agreement in principle in place with the lender before a bid is made, however the purchase price can differ significantly from the guide price which can lead to a shortfall to make up at short notice.
Assuming the property sells and the buyer then pays there is certainty but there is no guarantee that market price will be achieved.
Mitigate the risk if you are selling:
- Ensure as much information as possible is made available to potential buyers. A property is more likely to sell if people are able to carry out as full a due diligence process as possible, even if the result of providing this information is to flag issues with the property. Many buyers will be prepared to proceed if they feel they are getting a reduced price and are going into the transaction fully aware of potential problems. There will be a non-refundable auction fee payable even if the property does not sell and so it is worth making the property as attractive as possible.
- List the property with an appropriate guide price and reserve price. Although it can sometimes generate interest to list a property at a low price, under the terms of the Common Auction Conditions the reserve price cannot exceed 10% above the guide price and so there is a risk that the property can end up being sold for less than you would like.
Gardner Leader frequently advises both buyers and sellers on the auction process both in terms of preparing auction packs for sellers and reviewing and carrying out a due diligence process on potential acquisitions for buyers, whether as part of a portfolio acquisition or in relation to individual properties. We can agree a fixed fee in some circumstances to provide you with as much certainty as possible throughout the process and if you would like further details, please contact Louisa Baker (an Associate within our Real Estate Team, based at our Newbury Office) on 01635 508165 or send an email to Louisa Baker.