If you’re looking to buy a property at auction there are two prominent models – traditional and Modern Method of Auction.
The former generally involves turning up to an auction house in person to bid on a property after perusing the auctioneer’s catalogue.
The latter is more akin to buying something on eBay. It’s a slower online-based auction which gives you more time to get your finance lined up.
Some traditional auctions are now blurring the line between old and new after the industry was forced to reinvent itself during the pandemic, by enabling online bidders to complete with those in the room online or over the phone.
Traditional auctions tend to be favoured by experienced investors and cash buyers due to the speed and decisive nature of the process.
Indeed, if you win a traditional auction you need to pay the deposit on the same day, which is generally 10% of the purchase price. You’d then have just 28 days to deliver the rest of the cash.
National vs local
Local auctions can be suitable if there’s a specific market you want to buy into, as some smaller auctions have clusters of properties within a region you may be interested in.
If you’re open minded in terms of where you want to invest, a national auction held in a major city like London may be more suitable.
These can also hold a greater array of buy-to-let investments, including properties that are already tenanted.
Seeing as contracts are signed once the auction is over, the traditional method is a very reliable way of buying.
You’ve got transparency in terms of the level of interest in the property, as you’ve generally witnessed it live in the room.
There’s the potential to get a good price on a property, especially if you’re in a smaller local auction, as it depends who’s around to compete with you on that day.
Research is key
Speaking of price, you need to make sure you do your homework so you don’t get bamboozled into overvaluing a property based on a high guide price.
You should do your research by checking out comparative properties and what they’re selling for.
Also, if you’re relying on a mortgage make sure the home is mortgagable, unless you’re prepared to take out a more expensive financial product like a bridging loan.
More ambitious projects where you need to do work on a property can be more profitable, but you need to know what you’re getting into.
There’s always the possibility you could be outbid in the room after spending time and money conducting surveys.
The shorter timeframe means you ideally need to finance sorted early, to avoid having to take out a short-term loan to complete the purchase within the 28-day period.
Modern Method of Auction
The Modern Method of Auction model typically runs for 30 days, with you being able to bid at any time during the process.
Winners have to pay a reservation fee of around 5% of the price, which funds the costs of the estate agent and auctioneer. You lose this cash if you pull out of buying the property.
You then have 56 days to exchange contracts. This includes 28 days to pay a 10% deposit and a further 28 days to deliver the rest of the money.
Having twice the time period makes the process of getting a survey and mortgage sorted far less stressful.
However given that mortgage turnaround times fluctuate depending on how busy the market is, we’d still recommend you think about finance before bidding.
Having an auction online can widen the competition, as you might find you’re suddenly competing with an array of both domestic and international buyers for a property.
Some auctioneers like to attract sellers by offering a fee-free service, which means in effect the buyer ends up shouldering that burden.
There’s also the impact of the model on stamp duty, the buyer tax you pay when you buy.
Seeing as the buyers fee is considered a “chargeable consideration” for a property, If you bought a property for £400,000 with a 5% buyer’s fee you could end up paying stamp duty on £420,000.
Traditional auctions tend to be more suitable for those who prioritise a quick purchase and are more experienced investors.
The Modern Methods option is more accessible, being an entirely online service, while you’ve got plenty of time to consider how much cash you’re able to offer.
Whichever option you choose, we recommend you delve deeply into a catalogue to become familiar with the going rate for investment properties, as well as check out the potential home in person.
With property purchases there’s such huge sums of money involved that you need to do your homework and make sure you know what you’re doing before you bid.
You also need to work out the maximum price you’re able to afford, so as not to put yourself in financial difficulty by having a rush of blood to the head on the day of the auction, or the day the auction ends.