Do you like the idea of grabbing a bargain property at auction? Read on for the potential pitfalls to be aware of…
An auction purchase is like any other property purchase, except that the legal work is front loaded and, as such, there is no excuse for not checking the auction pack thoroughly beforehand.
Buyers often assume that involving a lawyer to review the legal pack for an auction purchase is not worth it and, in a bid to save money, commit to buying a property without any prior or proper investigation.
Have you ever heard the saying; ‘let the buyer beware’? The responsibility or failure to adequately investigate and understand the property being purchased rests with the buyer.
What is the process?
A legal pack is prepared, usually by the sellers’ solicitors which is available for review by potential purchasers.
Potential purchasers are encouraged to review the legal pack as well as view the property in person (preferably with a surveyor) before the sale takes place at auction.
On the day of the auction, upon the fall of the gavel, you become legally bound to complete the purchase or face losing your deposit.
This is because contracts are exchanged at this stage, but often this can be the first time that a purchaser has had anything to do with the property. You risk being in breach of contract for failure to complete and may lose the deposit paid (usually 10% of the purchase price), should you decide to pull out of the purchase due to issues which you only become aware of after the auction has taken place.
After exchange of contracts at the auction, there is usually a limited period within which completion must take place, often 28 days. This is the point at which some purchasers instruct a lawyer.
Defective title, breach of covenants, poor condition of the property, planning restrictions, unexpected costs and/or occupiers, to name a few.
Where a mortgage is needed to complete the purchase, your lender may not, for example, lend against a defective title or where there is a breach of covenant, as this would not be seen as a ‘good and marketable’ title which is what a lender expects.
Is Stamp Duty Land Tax (SDLT) payable?
As with any property purchase, SDLT will be payable if the purchase price agreed at the auction meets the required threshold. Be aware of the likely tax payable and be prepared to budget for this.
What can you do to avoid these issues?
- Do your research prior to the auction date.
- View the property in person (preferably with a surveyor), not just online and ask questions of the seller’s lawyers and auctioneers.
- Read the legal pack carefully and instruct a lawyer to do so on your behalf.
- Set your budget, don’t get carried away.
- Get your finances in order – greater knowledge of the property will assist securing a mortgage if one is needed.
- Remember that auction purchases require quick timescales for completion.
- In essence, preparation is the key for a successful auction purchase.
Our team can assist with reviewing and reporting to you on the contents of the legal pack (as well as flagging any documents that are missing from the pack), before the auction date, so that you can place your bid with confidence.
Just like any other property purchase, do not make the first time you properly investigate the property be after you have already exchanged contracts and committed to the deal.
This is only intended to be a summary and not specific legal advice. If you would like further information or advice in relation to auction purchases, please contact June Johnson or another member of our property team.