BRICK AND MORTAR
By Rebecca Atkinson
Friday, Juy 17, 2009.
Editor’s note: This article is targeted at readers residing in Britain. Please always seek expert opinions when making financial decisions.
House prices have fallen significantly over the past 18 months and it is now possible to pick up some real bargains. Whether you are a property investor, a buy-to-let landlord looking to extend your portfolio or are simply looking for a new home, then the slow market and lower asking prices could well be whetting your appetite for buying.
At the same time, with increasing numbers of people unable to pay their mortgage, the number of properties being repossessed has also risen. This means there is a large amount of housing stock sitting on the market, potentially at a significantly reduced value.
For people interested in buying now, seeking out a repossessed home represents a real opportunity to snap up a property at a discount. However, you need to know where to look – and also consider the risks involved, especially if you are planning to buy through an auction.
Where to find repossessed property
The repossession process is fairly complicated, and begins when a homeowner gets into difficulties meeting their monthly repayments. Banks and building societies have pledged to do more to help struggling borrowers manage their mortgage and secured loan debt, with repossession treated as a last resort.
While this appears to be happening – the Council of Mortgage Lenders (CML) recently said it does not expect its prediction of 75,000 repossessions in 2009 to be realised – there were still 12,800 repossessions during the first three months of 2009, a 50% increase on the same period in 2008.
After a lender has taken possession of a property, it is likely to appoint an asset manager to ensure it is empty, clean and ready to sell. The property will then either be put on the market through an estate agent or sold directly through an auction. According to the CML, the method of selling the property will depend on its value in the market; if the lender is looking for a quick sale, it may opt for an auction. However, if it feels the property is likely to attract a lot of attention, it may decide an estate agent is the best way to achieve a sale.
Bernard Clarke, spokesman for the CML, says: “A mortgage lender has an obligation to the former homeowner to achieve the best value for their home; it also has to achieve a good value for its own sake, as it will want to avoid a shortfall on the outstanding debt. Holding out in order to achieve a higher price could end up costing it more.”
If you are looking to buy a property, and hope to achieve a cheaper price by buying one that has been repossessed, then contact estate agents in your area to see what they have on their books.
You can also use a new website, propertyearth.net, which lists around a thousand chain-free properties, including repossessed flats and houses, probate homes and unsold new homes from property developers. At the time of writing, the cheapest property up for sale was just less than £20,000 and the most expensive was on the market for £650,000.
The website allows you to search for property by price, postcode or description; when you find one you like, you simply contact the estate agent involved. The one thing every home has in common is that there is no chain involved.
Dominic Toller, managing director of propertyearth.net, says: “There is often a stigma attached to buying a repossessed property because of the often sad background story behind the sale, but the reality for buyers is that the owner, for whatever reason, is motivated to sell and may well be open to price negotiations.”
Auctions, meanwhile, might be more up your street because the process can be a lot quicker – once the hammer falls the lot is technically yours and the sale then has to complete within 28 days.
Another advantage of buying at auction is that you can usually get a good deal – while there are no exact figures on this, experts generally say buyers can save up to 30%. However, the actual price you achieve will depend on the type of property, why it is being sold at auction and how many people are interested – a lot of competition could drive up the price.
You can find auctions in your area by looking in specialist property magazine and newspapers. Estate agents may also be able to help. According to The Essential Information Group, which provides nationwide data on property auctions, April saw 2,333 lots put up for auction, of which 70% sold. The majority of property being put up at auction is in the North West, closely followed by the South East, London and Yorkshire and the Humber.
The Essential Information Group, which was established back in 1990, can provide you with detailed information on 400,000 property auctions across the whole of the UK. Although you have to pay for the data, if you are serious about buying at auction, you can use the website to not only find historical information on auctions but also to monitor lots currently available.
Another website, propertyauctions.com, allows you to search for property auctions and look at the available lots online.
How to buy at auction
Before the big day…
The most important thing to remember when buying at auction is to do your research in advance – the process is a lot quicker than buying through more traditional routes and it’s vital you know what you’re bidding on in advance. Don’t get carried away with the excitement of the day.
Once you find an auction, make sure you request a catalogue and go through it carefully. This will provide details on the property up for sale, how to view lots and the general conditions of sale. You should also consult a surveyor or valuer to get their professional opinion on a property, in the same way that you would if you were buying on the open market.
It is not always compulsory to view a lot in advance of bidding on it, but unless you really like surprises, you should always try and inspect the property in question at least once. You may find it to be in a poor state, so it may also be necessary to consult a builder on the costs of bringing it up to scratch.
Notify a solicitor in advance of the actual auction, so that it can obtain any legal information on your behalf. Hand over any legal packs provided from the auction house, as well as the listing in the catalogue. Also, check for any special conditions related to the sale, as these could seriously affect the cost of buying a property through auction. For example, you may be required to pay the seller’s legal fees.
David Hollingworth, mortgage specialist at London & Country, says: “Buying at auction shouldn’t be all that different to buying through an estate agent – you really should consult a solicitor to make sure the lot is worth buying. It’s no good buying a property at auction on the cheap if it’s a dump.”
Last, but definitely not least, you need to get your finances in order before the day of the auction. Once the hammer goes down, you must be able to hand over a 10% deposit, with the remaining 90% required within 28 days. Don’t assume you’ll be able to get finance in that time – it’s wise to ensure you have a loan or mortgage agreed in advance of the auction and an application in process, or you’ll risk losing your 10% deposit.
Unless you are a cash buyer, consult a mortgage broker to find out the best way to apply for a mortgage. Although most lenders will issue mortgages on homes bought at auction, the process can be slightly complicated as, obviously, you do not know how much the property will go for.
You can then make your application in the normal way; your lender will need to issue a valuation of the property so be prepared to pay for this as well as legal fees. According to Hollingworth, valuation and legal fees vary but could cost around £1,000, while commissioning your own survey will set you back £500 or more.
Here lies the real risk of buying at auction. In order to make sure you don’t lose your 10% deposit, you must be prepared to pay out in advance of the bidding to get finance in place. However, if you don’t end up being the successful bidder on a lot, then you risk losing the money you’ve already paid.
Hollingworth says buying at auction isn’t for the faint-hearted or those without money to hand – as well as having the 10% deposit to pay the auction house, you’ll need to take into consideration the deposit your lender will ask of you. The larger the amount you have to put down, the cheaper the mortgage rate you are likely to secure.
“Do your homework, set a budget and make sure you have everything prepared in advance,” advises Hollingworth. “There is a real risk you could get carried away with the bidding and overspend. You could also win a bid only to find out no lender will give you a mortgage for it.”
If you are using a mortgage to buy a property at auction, then remember that you also need to consider buildings insurance as this is required by banks and building societies before a sale can complete.
On the day…
Before you head off to the auction house, call it up to make sure the property you are interested in is still available and hasn’t been withdrawn. You should also make sure you take your deposit with you – most auction houses will accept cash and cheques, but check before the big day. You are also likely to need two forms of identification.
When you get to the auction house you will be required to register your name, address and contact details. Once this has been done, you’ll be issued with a bidding number and allowed access to the auction room.
Don’t forget to request an ‘addendum sheet’, which has additional information about the property up for auction. Check it for any changes to the lot you are interested in.
It’s best to try and get to the auction early, to ensure you get a seat. If there are any lots up for bidding before the property you are interested in, then consider sitting in on these, especially if it’s your first time, as they will give you an idea of how the process works.
When your lot comes up for bidding, stay calm and remember what your budget is. Some bidders may wait to gauge interest in a property before making their bids while others are happy to kick things off. Remember, be aware of when you are bidding, as scratching your head at the wrong time could see you suddenly get in on the game.
Remember, all lots up for auction will probably have a reserve price – that is to say, the minimum amount the seller is prepared to accept. You will have seen the guide price (the amount it is expected to sell for), but the reserve price is not disclosed.
If the bids on the lots don’t meet the reserve price, then the seller may well keep hold of the property. However, if they are keen to sell they may still be interested in negotiations – the auctioneers may act as agents and a deal could be done at the end of the auction.
If you can’t make an auction in person, then it is possible to make a bid by proxy or participate via the telephone. Speak to the auction house in question to find out the process for this.
The golden rules of bidding at an auction are:
* Do your research on a property before even entertaining the idea of bidding on it
* Get your finances in order before the big day
* Get there early and make sure you bring your 10% deposit and ID
* Don’t get carried away with the excitement – keep your budget in mind at all times
* Don’t be intimidated by other bidders
With thanks to Interactive Investors.
