Buying a property at auction is completely different from buying a property through an estate agent.
Auctions can be a great way to buy a property, but have some serious disadvantages too that you need to be aware of. I've seen buyers find huge success at auction, but I've seen a lot of people have a nightmare too.
I wanted to put this guide together to help you figure out whether or not buying a property at auction is good idea for you.
"Pros" of buying at auction
Let's start with the positive. What are the advantages of buying a property at auction?
1. You can "grab a bargain"
We've seen it on TV for years now... plucky property investors venturing into the world of property auctions trying to bag themselves a bargain.
And in all honesty, that's probably the best thing auctions have going for them. It is possible to pick up a property at a price you might never be able to if you were buying through an estate agent.
This is because auction houses will only take properties on if they're discounted in some way.
How much of a discount?
If you speak with a few auction houses, they'll tell you they expect sellers to set a reserve price about 10-20% lower than the price they'd get selling through an estate agent.
So an auction house will only take properties on if they're priced attractively. This is what gives buyers the opportunity to bag a bargain.
Of course, you're likely to be up against other bidders at the auction. This means that bidding could easily sail right past that low reserve price. So just remember this:
Yes, you can get a bargain when buying a property at auction... but not every property that sells at auction is a bargain.
As always, do your homework, figure out what price you'd be willing to pay, and don't exceed it.
2. Buying at auction is fast
One of the major frustrations with our property market in England & Wales is how long everything takes.
When you buy through an estate agent there are no timeframes or deadlines, so things can just drag on indefinitely. (According to data from the "Time to Sell Benchmark Study" from TheAdvisory.co.uk, the average time to complete after having an offer accepted is 11 weeks, with 10-20% of purchases taking over 17 weeks!)
Why do normal house purchases take so long?
Normal house purchases take so long because all the due diligence is done after you agree a price with the seller. Pulling together things like the searches takes weeks, and you may have to wait on other parties in a chain. There are no formal agreements in place that commit people to certain timeframes either.
With auctions, the opposite is true:
- The seller provides a legal pack for auction sales, meaning you get your due diligence done before the auction.
- Property auctions are chain-free.
- Auction sales are legally binding when the hammer falls, so there are strict deadlines for everyone to hit.
These three things means that things move really fast after the auction takes place.
With most auctions, you'll have the keys within 4 weeks of placing your winning bid. (It can often be more like 8 weeks if buying via "modern method of auction").
No waiting on completion for 6 months when buying through auction!
3. Buying at auction is final (seller can't pull out)
There's nothing worse than agreeing a purchase through an estate agent, spending hundreds of pounds on searches and surveys, and then having the seller pull out of the sale on you several weeks into the process.
House sales fall through for all sorts of reasons. For example:
- The seller could simply change their mind,
- They might lose their onward purchase and decide to stay put,
- They might accept a higher offer than yours, even if it's weeks later (this is called gazumping)
With auctions, none of these are a risk. When you place that winning bid and the hammer falls, the sale exchanges. This creates a legally binding contract between yourself and the seller. Neither party can pull out for any reason.
This is why such a tiny fraction of auction sales fall through, compared with around 30-40% of estate agent sales.
(Fall-through rates are slightly higher with the modern method of auction though. While there's still a contract that holds the seller to the sale, it's not as "final" as actually exchanging contracts).
It's also worth noting that although sellers can't back out after an auction, they're usually free to withdraw their property before it goes to auction.
4. Great for finding properties needing work
Auctions tend to attract more than their fair share of properties that have defects, are very run down, or need lots of renovation. In other words, properties with the opportunity to add lots of value.
This can be great for investors and property developers who like to roll their sleeves up and get stuck into projects.
For example, lots of inherited properties sell by auction. These are often quite dated homes in need of a full refurbishment.
Not all issues are obvious to the naked eye though. Properties with subsidence often sell by auction. While there is scope to add value by fixing serious issues and repairing damage, your profits will evaporate quickly if you overpay the property in the first place.
So make sure you get your survey done and get any building work quoted for before bidding.
5. Great for finding motivated sellers
There's a saying in poker that you need to "play the player, not the hand".
The same is true in every property negotiation. How good a deal you get will often come down to who you're buying from.
- If a seller's in a no rush, you'll never get a great price for them, regardless of the property or how much other interest it has.
- But if you can find a motivated seller then there's scope to get a great price.
So, how do you find motivated sellers?
Well, one thing auctions do really nicely is pull loads of motivated sellers into one place.
Going back to our earlier point, this is why it's possible to bag a bargain when buying at auction. Auction sellers are just more motivated than usual to get a deal.
Pre-auction sales & unsold lots
This "extra motivation" doesn't just go for auction day itself either.
Motivated sellers may be open to tying up a pre-auction sale with you. Click here to ready about how to buy a property before it goes to auction.
The same goes for sales after an auction. If a property fails to meet its reserve price, a motivated seller may be willing to come down to a lower price, so some of the best deals are done on unsold lots. This is where a property fails to sell at auction,
So that's it! Those are the five big advantages of buying a property at auction. But what are the disadvantages you need to be aware of?
"Cons" of buying at auction
Before you fall in love with the idea of picking up bargains left and right, let's discuss some of the disadvantages of buying property at auction.
1. Buying at auction is more risky
I'm a gamer in my spare time, so the easiest analogies for me to tap into are often video-game related. This one is very appropriate.
Buying at auction is like playing the property game on hard mode.
It's not just for one reason, it's everything. The properties, the process, the commitments...
- Auctions attract more than their share of "problem properties".
- While some problems are disclosed or are visible to the naked eye, others are left for you to try and find out for yourself. (so-called "Buyer beware").
- You've got less time to do your due diligence than when you buy through an estate agent.
- There are big, serious commitments made, and backing out of an auction purchase can be incredibly expensive.
I hear from so many buyers who get themselves in a real bind. We're talking about people losing tens of thousands of pounds because of making a wrong move. The risks are very real.
Check out this free download to learn more:
2. Fewer properties available
You have much less choice when buying at auction.
We analysed monthly data released by EIG, the industry-standard for property auction information. According to their data, 17,255 homes were sold at auction during in the 12 months prior to September 2021.
By comparison, data from the Office for National Statistics tells us that a total of 845,678 homes were sold during the same period...
This means auctions only account for around 2% property sales...
In other words, you have 50x more choice when you buy through estate agents compared with buying through auction!
3. Not everyone can buy at auction
Because the auction process is so different to buying through an estate agent, not everyone can buy.
When you buy through a traditional auction, you have to complete within 4 weeks of winning the auction. This isn't really enough time to get a conventional mortgage in place:
- Although some mortgage lenders can move that fast, there are no guarantees.
- Penalties are harsh if you miss your completion deadline too - so it isn't worth the risk.
- Remember that you aren't guaranteed to get a mortgage either - the lender may discover some issue and refuse to lend.
This means auction buyers usually need to be buying with cash, or have specialist auction finance in place. (Note that auction finance is riskier and more expensive than a traditional mortgage though).
Properties sold through the "modern method of auction" often allow more time to complete; 8 weeks is typical. This is usually enough time to get a mortgage, but you still need a plan-B in case your mortgage is refused.
Follow the link below to learn more about financing an auction purchase.
Auctions and house chains don't mix
Another reason auctions aren't for everyone is because they don't really work if you're in a chain.
As we've covered, auctions have set timeframes everyone needs to work towards. If you're in a housing chain though, you're simply not in control of your timeframes. You're relying on your buyer, numerous solicitors, and maybe even other transactions further down the chain.
If you commit to an auction purchase, there's just no guarantee that everything will fall into place for you to be able to buy it. And there are serious consequences if you win a property at auction and can't pay.
Can first-time buyers buy at auction?
We've covered that conventional mortgages are a risky play at auctions, and that it's not right for buyers in a chain. But what about first time buyers? Check out this article to learn more: Should First Time Buyers Buy At Auction? (My Advice)
4. Auction fees can be expensive for buyers
When you buy through an estate agent, the seller pays the estate agent's fee. The average fee will be around 1-1.25%+vat. Not too pricey...
With auctions, it's often a little different.
First of all, the buyer is often expected to pay some, or all, of the auction fee. We mystery-shopped 29 auction houses and nearly all of them (27/29) charged the buyer a fee directly. This is often called the"buyer's premium".
The average buyer's premium was around £975+vat, but could be much higher.
For example, many of the auction houses running the modern method of auction charge buyers a £5,000+vat minimum fee. Some go even higher though, charging buyers 3%+vat of the purchase price instead. (That's a £15,000 fee on a £400,000 property when you include the vat!)
Having to cover these hefty auction fees as a buyer has two consequences:
- Big fees eat into your bid. Say you're willing to pay £200,000 for a property. If there's a £5,000+vat fee, it means only £194,000 is making its way to the seller. It's quite a hit, and they may be less open to doing a deal at that price. It can mean you need to increase your bid to get to a figure they're happy with.
- Big fees eat into your finance deposit & renovation budget. Let's take the same example as above. Say you're buying with auction finance and need to place a 15% deposit. On a £200,000 purchase, you need £30,000 cash for your deposit. But if you need to pay a £5,000+vat buyer's fee, then you actually need £36,000! Quite a hefty jump... especially if you need lots more cash afterwards to finance a development project.
These fees are always disclosed by the auction somewhere, but you might have to do some digging to find it.
Unfortunately, not everyone expects this or finds it, leading to awful outcomes like this:
Having to cover fees is definitely a downside of auctions. Of course, the auction houses would justify their hefty fees by explaining that they're finding interesting properties and making them available at good prices, and maybe that's a fair claim...
It's up to you to decide.
Beware hidden fees...
One more note on fees. There are so many stories of these hefty fees being hidden within pages and pages of small-print. It's really important to read that stuff.
I mentioned earlier that we regularly mystery-shop the country's leading auction houses. I won't name the auction house, but one gave us some pretty chilling advice about fees:
They told us "you can just add a special condition to recoup the fees from the buyer. 70% of them don't even read it anyway."
It was pretty shocking to have someone outright suggest something that sounds like quite a shady, unethical practice. But for some auction houses, this kind of thing is just par for the course.
Read all that paperwork closely before bidding.
5. Time, effort & money will feel wasted
When you buy through an estate agent, you view the property and make your offer. If it's accepted, all the due diligence starts.
Auctions work the opposite. With auctions, you do all your due diligence before you bid.
So what's the problem? Well, due diligence is expensive and time consuming:
- You should view the property,
- Get a survey,
- And have a solicitor review the legal pack for you.
Do your due diligence and your valuation work, and then decide how much you're willing to bid. That's how to survive the auction game.
Unfortunately, you aren't guaranteed to actually win the auction after all that work. This can feel like money down the drain again and again when you aren't winning.
I think that's one of the reasons so many buyers decide not to do thorough due diligence before bidding. But this is an awful, awful mistake. I get calls from so many buyers who've taken shortcuts with their due diligence, and then walked into a money pit.
Don't let this be you.
Although due diligence is time consuming and expensive, and it can be tempting to skip, if you want to find success with property auctions you need to get used to it.
6. Bidding wars
We've all heard one of the golden rules of auctions: "Decide on your maximum bid, and then stick to it".
You need to be aware of something though... it's far easier said than done.
A quick history lesson: The word "auction" comes from the Latin word for "increase". And that's exactly what the process is designed to do.
Auctions have dated back at least 2,500 years, and during that time the process has been optimised for one single thing: to get you to pay more than you want to.
So at auction we're up against thousands of years worth of auctioneers figuring out how to expose flaws in human nature, and make our irrational brain do something our rational brain doesn't want to.
The "holy grail" for an auctioneer is to create a bidding war, where prices quickly race up. And they work.
Check out this graph I put together.
This was a reader who ended up selling her house at auction a few months ago. The property was auctioned online, and you see the price race up by over £50,000 in just 2-3 minutes.
That was an online auction. Just think what it's like when you're in a tense, crowded room, auctioneer barking out bids and creating urgency, you can see who you're up against... it's an intoxicating environment.
While this is great for the sellers, it's awful for buyers. Over-paying for auction property is one of the biggest mistakes you can make.
7. Auctions are final (you can't pull out!)
Remember how the 3rd "pro" was how buying at auction is final? The finality of auctions is great because the seller can't pull out and change their mind...
Well, it works both ways.
If you come across something after the auction that makes you want to pull out, you can't. It's literally in the law.
It's set out in Section 57(2) of the Sale of Goods Act 1979: "A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner".
So once the hammer falls, the deal is done and you're in contract to complete. It's legally binding.
I see so many buyers get themselves in hot water here. You cannot pull out of an auction purchase without serious penalties. So be careful with your bidding, and get your due diligence done first.
Don't get me wrong, there are lots of advantages to buying at auction:
You can get a good deal, there are interesting properties on offer, you'll buy from a motivated seller, and it's a fast and final way to buy a property.
But there are serious disadvantages of buying at auction too if you don't know what you're doing:
There can be hefty fees for buying at auction, there's a limited selection of properties, not everyone is eligible to buy at auction, you'll have to put a lot of time and money into researching properties you don't end up buying, and it's riskier because auctions are final, so you can't pull out afterwards.
If you get your head around auctions and follow the best practices before bidding, you can make auctions work for you.
By Matthew Cooper, Co-Founder of Home Selling Expert