What are the pros and cons of purchasing property at auction?
Property in the UK has always been highly sought after, especially as the demand for affordable housing continues to soar. However, if you’re a property investor or a buy-to-let landlord, purchasing a property at auction may present a cost-effective way of stepping onto the property ladder or expanding your portfolio. But, as always, you must exercise due diligence. After all, wallpaper can hide a multitude of imperfections and, if you’re not careful, that bargain property you’re eyeing could turn out to be a money pit. Therefore, in order to help you make an informed decision, here are the pros and cons of purchasing a property at auction.
What are the pros?
For many property investors and buy-to-let landlords, auction houses are very often the go-to place when it comes to expanding their portfolio. To understand why, some of the most popular reasons for purchasing property at auction include:
- Speed: Purchasing a property is often a fast-track process, giving those with the necessary funds the ability to pay immediately or within 28 days (depending on the court). This also gives you ample opportunity to apply for finance in order to support the expense, in particular, Auction Finance, which is a type of Bridging Loan.
- Potential bargains on offer: by going to an auction rather than the open market, you do have the potential to spot a potential bargain providing you carry out the all the necessary checks and conduct thorough research. Plus, you may wish to pay particular attention to properties that may not be mortgageable, such as derelict properties, properties lacking kitchen and bathroom facilities, short leasehold properties (under 70 years), severely damaged properties (e.g. fire damaged) or properties valued at £70,000 or lower.
- Less competition: Because you’re going through an auction rather than the open market, you’re only going to be contending with other property investors and buy-to-let landlords. This could mean less competition, but you should always be aware of your bid limit and whether it will allow for enough profit after everything is said and done.
What are the cons?
Meanwhile, whilst there are plenty of bargains and benefits to be had, you still need to tread carefully before placing a bid. So to help you gain a property that you desire and make a profit from, some of the aspects you need to be aware of when purchasing property using this method are:
- Due diligence is required: You should always consider your position carefully before placing any bids. As well as the cost of the property, you need to take into account the cost of surveys and any legal requirements, which could run into thousands of pounds if you’re not careful.
- Comparing properties takes time and effort: As well as the main property you wish to purchase, you should also consider looking at other properties in case you’re outbid. However, this takes time and effort since you’ll need to conduct multiple surveys and inspections. Yet in spite of this, a rule of thumb is that you should never purchase property without assessing its condition first using a qualified RICS surveyor.
- Prices can rise quickly: When purchasing a property at auction, you must always set a maximum bid limit since prices can rise quickly. This is especially true if you’re bidding against someone who is new and unfamiliar with the property sector.
- You need to make a deposit: If you’ve made a successful bid for a property, the auction house will require you to make a deposit on the day. This takes into account a set percentage of the property’s purchase price, which could be in the region of 10%, depending on the auction house. However, if you’re short of cash, this could be an issue without the necessary support. But, there is a solution.
What is Auction Finance?
If you are considering purchasing property, know that many professional property investors often choose to apply for Auction Finance, which is a form of short-term Bridging Loan. It works by you approaching lenders and describing the type of property you aim to purchase, as well as your maximum bid. As such, you can only bid up to an agreed amount for a specific property, otherwise, the lender will not support the expense. Plus, you also have to explain to lenders how you intend to raise the necessary capital (for example by selling or refinancing a property in your portfolio). This is a vital aspect to consider as it will determine whether an Open or Closed Bridge product is appropriate.
- Open Bridge: requires you to settle the Principle (capital borrowed) by an agreed period, which also determines when the agreement matures (e.g. within 12 months).
- Closed Bridge: requires you to resolve the Principle and the agreement by a set date.
You also have to consider the matter of interest charged on the product, which can be tackled in 3 different ways: Monthly Interest Payments, Rolled-Up-Interest and Retained Interest.
- Monthly Interest Payments: require you to make monthly interest payments until you’ve paid the Principle (i.e. the agreement has matured).
- Rolled-Up Interest: takes the Principle and the total amount of interest generated, requiring you to resolve them both in a single repayment once the agreement matures.
- Retained Interest: allows you to borrow some of the interest that will be incurred for an agreed number of months, which you are also charged interest on. However, this is kept by the lender and acts as a buffer. So, if you make monthly interest payments and happen to fall behind on a particular month, this will be used to pay it in your stead. Once the agreement matures, some lenders may also reimburse you a portion of the funds that you did not use.
Thinking about purchasing property auction?
Whether you’re an experienced property developer or new to the world of property investment, pursuing your goals in this sector can be frustrating at times. But if you’re looking for a cost-effective way of starting your portfolio or are intent on expanding into new locations, purchasing a property at auction could be the key to your success. Nevertheless, placing a successful bid at auction can still place a tremendous strain on your finances. But, rather than depleting your cash reserves, you could take another route and apply for Auction Finance. All you have to do is source a lender who can accommodate your needs.
At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking to purchase a property at auction, and in total confidence, apply for Auction Finance today or find out more with Rangewell.