Buying at auction – the benefits and pitfalls of the auction process

In the midst of a tumultuous property market and less-than-favourable mortgage rates, the appeal of swift and certain transactions has never been more attractive to sellers. This speed and certainty is readily provided by the auction process, where contracts are exchanged with the fall of the hammer, with a typical completion timeline of 28 days. It’s no surprise that auctions are gaining traction in this landscape, with some reports of an uptick in auction sales of up to 20%.

Buyers and sellers are irrevocably bound by the contract’s terms at the fall of the auctioneer’s hammer. Consequently, buyers must conduct their due diligence on the property before bidding. However, many potential buyers hesitate to invest in legal advice, fearing that it may prove futile if they are outbid. Nevertheless, the reality persists that a blind purchase could unearth significant defects in the property or its title, particularly if the property faced challenges on the open market.

Once the hammer falls, there may be no obligation on the seller’s part to assist in addressing these potentially restrictive, time consuming and expensive defects.

Non-cash transactions demand meticulous financial planning prior to the auction and, at a minimum, an agreement in principle from a lender. The final selling price can significantly deviate from the ‘guide price,’ leading to unanticipated expenses.

For sellers, a non-refundable auction fee is often levied, which is payable whether or not the property sells at auction. To counteract the risk of the property selling for too little, a ‘reserve’ price is commonly set. However, this reserve price must not exceed 10% above the guide price. Consequently, if the guide price is set low to generate excitement about the property, sellers may face disappointment.

How can these risks be mitigated? Not surprisingly, the answer lies in due diligence. The auction pack may seem comprehensive to prospective buyers, but a closer inspection by experts, whether they are surveyors, property solicitors or planning consultants, could reveal restrictive covenants that may impede development. These could include:

• A lack of planning permission, with potential difficulties in securing it from the local planning authority
• An Energy Performance Certificate rating that falls short of the legal requirements
• Property use classification that is incompatible with the buyer’s intended use
• Insufficient easements or the absence of formal access rights when necessary
• Structural issues like subsidence.

This list is by no means exhaustive. A legal expert might also identify information that is conspicuously absent from the auction pack, such as missing searches or incomplete title documentation.

To uncover issues that may not be evident in the title documents, it is strongly recommended that buyers commission a survey of the property. At the very least, buyers should physically inspect the property during the marketing period before the auction. This could reveal, for example, rights of way that burden the property for the benefit of neighbouring land or the need for expensive renovations. Buyers who intend to immediately occupy the premises should be doubly diligent in ensuring that the property is in good condition, while others may be more open to undertaking remedial work.

With comprehensive preparation, the surging trend of auction sales could indeed be an exciting development in an otherwise difficult market. Buyers and sellers should remain aware of the associated risks and take appropriate measures to make the most of this growing trend.