Buying a property at auction can be a thrilling and rewarding experience, and the allure of potentially securing a bargain can be very tempting. However, auctions often attract “problem properties” and it is important to be aware of the legal implications and risks involved when purchasing a property this way.
Often at auction, if you place the winning bid, once the hammer falls, that is it. You have a legally binding contract to buy the property and are usually required to pay a deposit straight away.
If you decide to not buy, you will forfeit any deposit you have paid in its entirety and run the risk of being sued for any losses. If you decide to go ahead and buy the property in spite of any issues, the costs may end up being even more.
It is therefore essential to thoroughly review the legal pack and carry out your own due diligence before you bid on a property at auction, ideally with legal assistance.
The legal pack will be available, usually online, before the date of the auction. The pack will contain information such as title information, searches and standard replies to property enquiries.
Instructing a solicitor well in advance of auction to carry out a review of the legal pack can help with identifying any potential defects the property may be subject to or any restrictions that could affect its value, the ability to mortgage to property or the purchasers ability to use the property as intended.
A solicitor will also be able to identify any information that may be missing from the pack that they would expect a seller to supply.
A standard due diligence exercise would involve a review of the following (albeit, this is not an exhaustive list):
- Title review – to ensure there are no restrictions that will prevent the purchaser from ending up with full legal ownership.
- Review of plans and access – to check that the correct rights of access are granted or that the property immediately adjoins the public highway.
- Review of incumbrances – to check there are no unusual rights over the property or any covenants that restrict use of the property for the purchaser’s intended use.
- A full review of the terms of the lease (if the property is leasehold) – to ensure that the terms of the lease are fair and not defective.
- Review of searches and enquiries – to ensure that there are no enforcement notices or issues with services being provided to the property.
Securing professional advice early in the process allows enough time to identify any potentially showstopping defects or defects that make it harder to secure mortgage finance and to put in place any necessary additional searches where further information is required.
It is highly important to continually review the pack up until the date of auction. Further information could be uploaded to the pack, or, more significantly, information that was once included in the pack, may be removed or adjusted.
For example; the extent of the property being sold could be changed, even days before the auction takes place. This could result in a purchaser bidding for only half the property they thought they were bidding for.
When buying a property at auction, once the hammer falls, the successful bidder is required to pay a deposit, which is usually 10% of the purchase price, immediately to the auctioneer. At this point, the winning bidder will also be asked to sign the contract which confirms the set date for completion and signifies exchange of contract. There will be no opportunity review the legal pack which is why is it essential it is do so head of the of auction.
If a defect is identified after exchange but before completion, it will come as no surprise that generally speaking sellers will not attempt to resolve the because of the buyers obligation to proceed to completion in spite of such defect. If a buyer does not proceed to complete, they will immediately forfeit their deposit.
A buyer at auction will usually have just 28 days to complete the purchase so time may be a major concern if third party funding is being used for the purchase. If this is the case, it is essential that requirements specific to the lender are met. For example, a lender may request that specific searches are put in place, some of which may not have been included within the legal pack. The survey may also be an issue because there is a risk that an auction property which attracts substantial interest at auction, may sell at price well above the true market value thereby leaving the buyer with insufficient funds to complete and little time to find a new lender. So while it is possible to borrow to buy an auction property, the process is much more complicated than a non-auction buy so it is essential to seek professional advice early
early enough in the process so that any specific requirements of a are identified and prepare in advance to meet such requirements. This would significantly improve a purchaser’s chances of satisfying a lender in the short 28 day window between purchase and completion.
Buying a property at auction is not straightforward, and it’s important to be aware of the potential risks involved.
Below are examples where we have been faced with individuals who have purchased at auction without first engaging a solicitor to review the auction legal pack.
The purchase of a leasehold property at auction where the lease did not contain any insurance provisions. As a result, the landlord was not obliged to insure the building but it is a standard requirement of most lenders that any leasehold property which they are lending against must be insured.. In this instance the landlord refused to amend the lease to include an insurance provision and as a result the lease was defective. The purchaser could therefore not obtain lending to complete the purchase, and if they proceeded with a cash purchase to negate the involvement of a lender, they would struggle to sell the property in the future. The property was not worth the sum the purchaser had bid for it.
The purchase of a property where the extent of the property being sold was altered days before the auction date. The individual had downloaded a copy of the auction pack well in advance of the auction but did not check for any variations to the pack before auction. Two days before auction the extent of the property being sold had been changed. The individual was successful at auction but ended with a property half the size they thought they had! Inevitably, the buyer had paid far more than they would have done had they realised they realised the true extent of the property for sale.
A restriction on the title which prevented the registration of a transfer without first procuring consent of a third party. The third party whose consent was required were not easily identifiable, and once they were identified, they were not willing to provide the consent. This resulted in the purchaser purchasing a property that they could not get registered in their name at the Land Registry.
In summary, the two main risks of purchasing at auction are:
- Not having enough information about the property and its potential defects.
- Not being prepared in advance with your finance in place.
A combination of these could lead a buyer to getting carried away in the excitement of the auction and overpaying for a defective property.
If you find flaws in a property that you have purchased at auction, it is already too late.
- Instruct a solicitor well in advance of the proposed auction to review and report to you on the details contained within the auction pack. This will arm you to make a considered decision before bidding at auction and assist with setting a realistic bidding limit.
- Have your funding arranged before Allowing your solicitor to review your lender’s requirement in advance will enable them to check for any lender specific requirements and deal with as many of these in advance, rather than dealing with them in the short 28 day window between exchange of contract and completion.
- Continue to check the auction pack for notifications right up until the time of auction. This includes any verbal notifications by the auctioneer at auction. If you are worried that you may have inadvertently missed a notification, check with the auction agent before you bid.
- Set a limit. It is easy to get caught up in the excitement of the auction. Setting a limit in advance can help you from overbidding and staying within your financial means.
- Ensure you are aware of any costs you are required to pay or contribute towards. Often seller’s insert terms within the pack to state that the successful buyer will pay for the property searches and/or contribute towards the seller’s legal expenses. If it is not clear from the pack, request confirmation of what these costs are before auction as these costs may eat into your budget.
This article by Jessica Arnold originally appeared in Estates Gazette.
