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Buying a property at auction: what you need to know

Buying a property at auction is exciting, exhilarating, and just a little bit scary. There’s an opportunity to pick up a real bargain (as long as someone doesn’t start bidding against you), it’s an instant purchase, and once you’ve bought your property it’s yours to do with as you wish (subject to any restrictions imposed on the property).. For commercial property entrepreneurs, auction purchases represent a substantial financial investment in one go, so before you grab your auction pack and start waving that numbered card in the air, there are a lot of things to think about first. Here is our guide to buying a property at auction and what you need to know to make it a successful purchase.

Do your research

Found the perfect industrial unit for your business?  Or a high-street front for your retail business that has plenty of footfall?? Commercial property is a way of consolidating and establishing  your business from which it can grow and prosper. It’s also a huge asset that gives your business real financial clout.

However, before you fall in love with that charming tea room that’s coming up for auction, or that development site, do your homework thoroughly. That charming tea room may be a listed building with restrictions on what you can and cannot do,; or that development site may be sitting on contaminated land that needs to be cleaned up before you can move in. The auction catalogue will give you the ‘blurb’, but our advice is to go and see the property for yourself.

Check with local councils to make sure there are no restrictions on use, or that the building isn’t sitting right in the middle of a flood plain. Never buy ‘unseen’, always check, double-check and triple-check that the property is exactly what you want and that there are no caveats that could cause some serious headaches later on. Remember, once you won the auction you are obligated to buy it ‘warts and all’. Make sure those warts aren’t going to be business-busters further down the line.

Make sure you have the funds in place

Before you even set foot into the auction room, make sure your finances are in order. Once that hammer falls, you’re under a legal obligation to buy the property ‘as seen’. The completion date is fixed beforehand, and as a purchaser, you need to comply with that date otherwise risk serious financial penalties.

Remember that it’s not just the price of the property you’ll need to have available, but the legal costs, auction fees, and in some cases, the dreaded VAT. You’ll need to pay the deposit for the property as soon as the hammer falls, so make sure your funds are fully accessible on auction day.

The funds you have available will dictate your bidding limit.Our advice is: don’t get carried away on auction day! Know where your limit is, and stick to it. Bid in the heat of the moment and you could go way over budget in just a couple of minutes.

The legal pack – everything you need to know about the property – or is it?

As soon as a property goes for auction, the seller will submit a legal pack to the auction house, which should be available via their website. This contains information about any title issues that may affect the property, and whether or not there are any covenants that may affect the purchase. It’s crucial to get your legal expert to check this over before you even think about registering to bid. The issue is that there is no legal obligation for the seller to include all the information, so it may take a trained property law expert to spot a red flag that could indicate a potential problem. The contract for sale normally excludes all liabilities so a legal expert is best placed to advise you on the terms of the contract.

Crucially, a legal pack will not necessarily contain a surveyor’s report. If you’re serious about buying a commercial property then it’s up to you to have a survey conducted before you bid.

If you’re applying for a mortgage to pay for the property then you will also need to ask your legal expert to check if there are any issues that could prevent a lender from approving a mortgage application. You need to do this as early as possible, so that you don’t find out on the day that your mortgage lender has said no, leaving you stuck with a potentially massive debt.

Extra charges

We’ve already mentioned that there could be a plethora of extra charges on top of the cost of the property, but what are they, and how much will you need to add on top of your purchase price?

Auction House fees – The auctioneer will take a fee from both the vendor and the buyer. Each house sets its own fees, so check beforehand how much the auction house will be charging you. Assume that you’ll be paying top money for the property, and if it goes for less then you may actually end up paying less in auction fees, which will be a pleasant surprise.

Stamp Duty Land Tax – Depending on the final price of the property, Stamp Duty may be applicable and is due within 14 days of completion. Make sure you have the additional funds to cover this. Check the government’s website at https://www.gov.uk/stamp-duty-land-tax for the latest rates.

VAT – You will be required to pay VAT on your purchase if a seller has opted to charge it, which can boost the price of your property purchase by 20%. If your purchase runs into the hundreds of thousands, that could be a huge additional fee you’ll need to find. The special conditions section within the property’s legal pack should specify whether or not VAT is applicable. If in doubt, ask the auction house before you bid.

Seller’s legal fees – Check the legal pack carefully, as the seller may stipulate that the buyer will have to cover some or all of their legal fees. As you’ll have legal fees of your own to pay, this could add another level of expense to your purchase. Again, be absolutely sure that you’re prepared to pay this fee before bidding, as it will be part of the final amount you’ll be charged on completion.

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