Buying a property at auction is quick and can save you thousands. But if you haven’t done your due diligence, you could soon regret your purchase. Just as you would do your due diligence when buying a property in the traditional way, it’s essential before bidding at an auction.
What is due diligence?
The due diligence involves making the necessary property and legal checks to ensure you’re aware of any potential risks and costs you may be liable for. This, in turn, helps you decide your bidding amount once you decide to proceed.
Why does it matter?
When the hammer falls on your winning bid, you immediately pay a 10% deposit and exchange contracts. You are then legally liable to complete within 28 days (or earlier if specified by the seller). If you haven’t done your due diligence and later discover faults in the property or negative financial aspects, such as arrears on the property, it is too late. You have no legal recourse and could have a very costly property on your hands.
How to carry out your due diligence
View the property to check its condition, design and whether any remedial works are required. Ascertain whether it’s in the right location and if it’s suitable for your purposes. For a property that requires work, it’s helpful to go with a builder who can advise you on the costs to carry out this work and any other issues that need attention.
Depending on your plans for the property, carry out similar checks to those you would with a traditional purchase. Check for transportation links and contact the local council to find out about planned projects in the area. Research the prices that similar properties have sold for in the area.
The legal pack
Check the legal pack carefully. This provides information that can include the title deeds, searches, planning permission documents, lease information, details of fixtures and fittings and the special conditions of sale. It is prepared by the seller’s solicitor and forms part of the contract. Once you have read through the legal pack, it’s recommended to ask your solicitor to look through it. Your solicitor can quickly spot any issues, in particular when reading the special conditions.
The special conditions determine the terms of the sale, such as the completion date (which may be earlier than 28 days), restrictions on what the property can be used for, additional costs you are liable for or whether you have to abide by specific terms before completion can go ahead. By including this information in the special conditions, the seller is absolved of any responsibility if you fail to do your due diligence before bidding on the property.
Whilst this is an extra cost, asking your solicitor to check the legal pack is vital to ensure you are fully aware of all the legal aspects relating to the property. Think of it as an investment that ensures you avoid nasty surprises at a later date that could cost you thousands.
Local searches aren’t always included in the legal pack and you may be reluctant to pay the search fees in case you don’t buy the property. In this instance, speak with your solicitor about search indemnity insurance.
Seek further professional advice
Instructing a surveyor is recommended to check the structure of the property before you attend the auction. Having a survey done in advance is also a good idea when arranging a mortgage as your auction finance. It saves precious time when waiting for your mortgage to be finalised before the quick completion date. It’s also important because surveyors flag issues you may not be aware of, such as subsidence or Japanese knotweed, which render the property unmortgageable.
This is also the time to visit the property with a structural engineer or an architect depending on your plans so that you’re fully aware of all issues and costs involved before you begin bidding.
Check for last-minute amendments
On the day of the auction, be sure to check the list of addendums in case any last-minute changes have been made. There may be a change to the price, for example. This is important to ensure you don’t get caught unawares when bidding.
Consequences of not doing your due diligence
Bargains are to be found at auctions but many properties are sold at auction because there are issues with the legal titles or they are in bad condition. If you haven’t checked everything properly before you bid, you could be in for a nasty shock later. What you thought was a good bargain may turn out to be a money pit.
You enter into a legally binding contract as soon as the hammer falls. If you find fault with the property before the completion day, there is no way to rescind the contract. If you fail to complete, you lose the 10% deposit you paid. Not only that, but the seller can take legal action against you. If, for example, the property later sells for a lower amount, you may be legally liable to pay the difference.
Is buying a property at auction worth it?
Assuming you’ve done your due diligence, buying a property at auction can be very rewarding. Aside from potentially finding a great bargain, you have ownership of the property in a short space of time. During this time, you don’t have to worry about being gazumped or the purchase falling through for any other reason.