Are you thinking about buying a property at auction? On the fall of the auctioneers hammer a buyer will then be under a legal obligation to buy the property 'warts and all'. A completion date is fixed at the auction and a buyer has to comply with the terms of the auction contract. It is important that a buyer undertakes all proper due diligence before bidding on or exchanging contracts to purchase an auction property. Consider our ten top tips for buying at auction before you do:
1 - The legal pack
A seller will always make an auction or legal pack available for the property. This is usually available via the auctioneer’s website. Sellers are generally advised to make a pack available as early as possible but it does vary from property to property as to when they are available.
Buyers should always have the legal pack reviewed by a solicitor. There is no legal obligation on a seller to disclose any particular issue with a property. In addition, there is no obligation on a seller to include any particular document within a pack. Sellers can include what they wish. If there is a document missing from a legal pack it may be an indication that if that document were supplied it may reveal an issue.
The legal pack should be reviewed to identify whether there are any title issues affecting a property. If, as a buyer, you have a wish to use the property for a particular purpose after completion the pack should be reviewed to ensure there are no covenants on the title to property preventing this. Many issues can be revealed within an auction pack which is the reason it is particularly important a pack is reviewed.
If a buyer is obtaining mortgage funding for the purchase of a property, a buyer should ensure the title is sufficient to be approved by a mortgage lender. If it is not, a buyer could find themselves in a position where they are subject to a contract to complete but cannot get mortgage funding as a lender will not approve it.
2 - Survey
The legal pack for a property will not contain a survey. On the fall of the auctioneers hammer a buyer is placed under an obligation to buy the property for the amount of the winning bid. If, for example, a property has a structural defect which is discovered after the auction and exchange of contracts has taken place then a buyer cannot simply withdraw from the contract without penalty. It is therefore important to ensure that as a buyer you have a survey of the property before attending the auction. Any structural defect in a property could affect a buyers ability to obtain a mortgage.
3 - Stamp Duty Land Tax (SDLT)
As with all property purchases Stamp Duty Land Tax may be payable on the acquisition of a property at auction. When considering your budget you should allow for, in addition to the purchase price and all other charges, SDLT if it is payable. This tax is payable within 14 days of completion so it is important that as a buyer you ensure the funds are available for this tax within this timescale. Further information on SDLT duty rates are available at: Stamp Duty Land Tax
4 - VAT
VAT can be payable on a property if a seller has opted to charge VAT. This can increase the amount of the purchase price by up to 20%. In addition, SDLT is payable on the amount of the purchase price including VAT and so this can also increase the amount of tax payable. It is important to identify whether or not VAT is payable on a property to ensure a buyer is able to calculate the amount of funds that will need to be available for completion. The special conditions within a legal pack should confirm this.
5 - Extra charges
It is common for a seller to require a buyer to pay additional sums on completion in addition to the purchase price. If searches are included within a legal pack, sellers will usually require the buyer to refund that cost on completion. In addition, it is common for sellers to require the buyer to pay some or all of their legal fees. These additional charges will usually be set out in the special conditions contained within a legal pack.
6 - Budget
It is important for a buyer to set a budget for themselves before going to auction. A buyer needs to consider what sums, in addition to the purchase price, some of which are detailed above, will be payable on completion. The special conditions will set out when completion must take place but it is usually within 10 to 20 working days after the auction or the date of the contract. A buyer needs to be certain the funds will be available for completion. For this reason it is important for a buyer to set themselves a budget linked to their cash available for completion and not go beyond that budget at auction.
7 - Funding
A buyer should ensure they have considered how they will fund the transaction before the auction. As previously stated, a seller sets the timescale for completion but it is usually required to take place within 10 to 20 working days. This is a very short timescale if a buyer wishes to obtain mortgage funding. Whilst a buyer may not wish to incur the cost, a buyer would be wise to obtain a mortgage offer for a property before going to auction to ensure the offer is issued before or shortly after the auction. This is to allow solicitors to then comply with any conditions the mortgage lender has.
8 - Leases and tenancy agreements
A property in auction may be subject to a tenancy agreement, lease or even an unlawful occupier (that is an occupier without any lease or tenancy agreement in place). Many buyers intend to buy a property at auction as an investment and are happy to take on a property with a tenant in place. Even so, all leases and tenancy agreements are drafted differently. It is important that any such lease or tenancy agreement is reviewed to ensure the terms are sufficient and the drafting adequate. If they are not adequate this could affect a buyers ability to mortgage the property or event sell it in due course.
As a buyer who wants to occupy the property themselves then it is important to check that there is no lease, tenancy or occupier in place as if there is it could affect a buyers intend use of the property.
9 - Who is the buyer?
A buyer is named in the auction contract. Once named, it is that person or company that must complete the contract. A buyer should consider who is going to buy the property before the auction. A buyer may wish, for tax purposes, to purchase a property in a particular name. Any tax advice should ideally be obtained before the auction. If a buyer is obtaining mortgage funding then the mortgage lender may, for instance, be willing to lend funds to a buyer personally and not their company. It is therefore important to consider who will be buying the property and, if appropriate, who will be borrowing any funds. Once exchange of contracts has taken place the identity of the buyer is fixed. A seller can be asked if they will agree to a change in the identity of the buyer but there is no obligation on them to agree. If a seller does agree to such a change there will usually be additional legal fees for the buyer to pay.
10 - Timing
If a buyer undertakes proper due diligence before the auction it can take time. A buyer should identify a property as early as possible to allow them to consider all the points raised here and then deal with or try to resolve any issues revealed by that due diligence. A review of the legal pack is important but buyers should allow sufficient time for solicitor to do that.
Timing is also important after the auction. A buyer should be aware, before the auction, of the completion date and be certain they will have all the funds available to complete on time. Ultimately, if completion does not take place within the required timescale a seller can terminate a contract and retain the deposit. This means the buyer would lose any deposit paid. A seller could also claim compensation from a buyer for any other loss they incur as a result of buyer not completing. This often includes, but isn’t just limited to, the seller’s legal fees.
Our commercial property and residential conveyancing solicitors are experienced in advising on auction properties and can work with you in auction transactions. Call us now on 0161 696 6229 for a no obligation quote.
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