With the property market often feeling so competitive, it's getting more and more difficult for people to get on the housing ladder.
This is leading more first-time buyers to consider buying at auction, wondering if they might have a better chance there.
But can you buy an auction property as a first-time buyer?
It is possible for first-time buyers to purchase a home at auction, as long as they have their financing in place. However, buying at auction comes with some significant risks, there are far fewer properties to choose from, and auction properties often have other issues you'll need to resolve later.
In theory, auctions do have a few benefits for first-time buyers:
- They sometimes offer the opportunity to buy property at a reduced price,
- Auctions are much faster than buying through estate agents,
- There's no risk of the sale falling through afterwards.
However, I think these advantages are often overstated - especially when it comes to the chances of bagging a bargain.
Unfortunately, there are a lot of aspects of buying at auction that offer particular challenges for first-time buyers too.
Personally, I usually advise first-time buyers to steer clear of auctions... but not always. So let's explore the topic in more detail.
Section 1. Disadvantages of auctions for FTBs (Do you really need to buy at auction?)
Buying your first home is a really exciting time. And the thought of bagging a bargain at auction is a really seductive thought too. But the first thing I want to do is pour a little cold water on that excitement.
Let's talk about the disadvantages that first-time buyers face when buying at auction.
1. There's not much choice at auctions
One of the appeals of buying at auction is the prospect of "getting a good deal". But when you buy a home, you don't just want to make a savvy financial move... you want a home you actually want to live in as well. You want the right location, the right size property, the right style and layout, and so on...
That's one of the great things about buying through estate agents. Most people sell through agents, so it gives buyers loads of choice.
By comparison, far fewer properties sell by auction each year, meaning there's much less choice.
How many properties sell by auction each year?
We analysed monthly data released by EIG, the industry-standard for property auction information. According to their figures, 17,255 homes sold at auction during in the 12 months prior to September 2021.
We compared that with data from the Office for National Statistics, which 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've got almost 50x more choice when you buy through estate agents than when you try and buy at auction.
Maybe you've already found the house you really want though, and it's being sold via auction. So let's explore further...
2. Mortgage difficulties with auction timeframes
It's important to understand how buying through auction differs to buying through an estate agent. With estate agent purchases, you've got no time limits. (This is one of the reasons they drag on so long... there are no deadlines or urgency).
With auctions, it's different. That auction hammer has the magical ability to create real legal obligations. So if you place the winning bid and that hammer falls, you'll be committed to the purchase. The fall of the gavel means three things:
- Exchange. You will legally exchange on the purchase of the property. (Exchange is the point in a house sale where things become legally binding. Buyer and seller would each face significant financial penalties if they tried to pull out afterwards).
- Deposit. You have to pay a hefty deposit immediately. For traditional auctions, it's 10% of the purchase price. For properties sold through the "modern method of auction", it's usually more like £6,000. (More on modern auctions later).
- Completion deadline. This is the big one. When that hammer falls, you'll have just 4 weeks to complete the sale. (With modern auctions it may be up to 8 weeks, but we'll revisit this later).
This is one of the main reasons buying at auction is so challenging for first time buyers: You only have 4 weeks to complete afterwards.
Here's why that presents a problem:
There's no guarantee that your mortgage lender will come through before the deadline.
In fact, there's a chance they'll refuse the mortgage entirely... For example,
- Survey problems. Even if you had a survey on the property before bidding, the mortgage lender's surveyor could disagree.
- Financial checks. Even if the survey's all-clear, the lender may find some issues with your financial position or credit checks, and refuse your mortgage. (Yes - this can happen even if you already have a Mortgage Agreement in Principle).
What happens if your mortgage lender won't lend?
So... what happens if the lender fails to come through?
Unfortunately, you can't pull out after an auction. You've entered a legal agreement to buy the property, and placed that hefty deposit. This means you will lose your deposit if you can't complete. (You could face other penalties on top as well).
This would be dreadful, and in this case it's happening because of things entirely beyond your control.
Auction finance as a back-up
If you're trying to buy at auction with a mortgage, things may fall into place just fine. The surveyor might be happy, your finance checks may be good, and the lender may come through in time.
It's just really risky to bet a 10% deposit on all that happening. It could be a good idea to arrange auction finance as a back-up in case your lender fails to deliver.
Auction finance (also called bridging finance) is like a mortgage, but different:
- Expensive. For one, it's more expensive. (Expect to pay 1-2% in arrangement fees, and 9-15% in interest per year!).
- Short-term. Secondly, there's a time limit on it. You usually have to repay a bridging loan within 9 or 12 months.
The idea would be that you'd take the bridging loan, fix whatever issues the property had, and then refinance on to a conventional mortgage afterwards. It's a pricey option though...
3. Can you really bag a bargain at auction?
When I speak with people thinking about buying at auction, I've definitely noticed a pre-conception which isn't exactly true.
A lot of people seem to believe that if you buy at auction, then you'll get a good deal. But this is not always true.
Yes, some properties sold at auction do go for a bargain price. But not every property that sells at auction is a bargain.
Fewer auction bargains now than in the past...
As auctions enter the main stream and modern auctions makes it easier for more buyers to get involved, the amount of competition between buyers increases.
This means that those "bargain prices" kind of get competed away, and properties end up selling for prices nearer their full value.
When you add in the extra auction fees you'll often face, the idea of a "bargain" can disappear quickly.
There's just something I thought it'd be helpful to debunk a little bit too...
- During my research for this article, I've seen claims elsewhere online that if you can just go and buy repossessed property at auction at a 30% discount.
- That's just nonsense though.
- The average house price is over £250,000...
- 30% of that is £75,000...
- There just isn't £75,000 lying around at auctions waiting for people to come in and pick it up.
Maybe 20 years ago properties did sell at these kind of price levels semi-regularly, but it's nonsense to think every property at auction is a bargain like that now.
In fact, within property investor communities I've even heard of people buying a property through an estate agent, then instantly reselling it at auction because they know they'll get a higher price there.
Property auctions are far more competitive than they were in the past. And while it is absolutely true that you could get a property at a nice discount and bag maybe £10,000 in free equity, don't expect it to be easy.
I think one of the reasons people still think auction properties are so cheap is because auction asking prices (called "guide prices") are so cheap. But auction properties don't really sell at the guide price...
Auction properties don't sell for the guide price
It can be exciting scrolling through an auction listing page for the first time and seeing all these properties listed at insanely low prices.
But auction properties don't sell for these low guide prices. This is for two reasons:
- Guide prices are deliberately set 10% below the seller's reserve price. This is to make the property appear cheaper in order to entice bidding.
- Buyers then compete to outbid each other, pushing the price up and above the reserve price.
We analysed 14,142 residential properties that sold via auction during 2021. We gathered guide price and sold price data where available, with the aim of finding out how far above the guide price auction properties really sell for.
- Properties with guide prices above £50,000 sold for an average of 40.4% more than their guide price. That's an average selling price of £37,084 over the guide!
- Properties with guide prices below £50,000 sold for 154.0% over the guide price. That's an average selling price of £35,412 over the guide! (Note: Properties with guide prices below £5,000 were removed to prevent skewing the data).
So is all hope lost? Well, even at £37,000 over the guide price, many properties will still be selling under their full value.
Furthermore, this analysis ignores properties that sold before or after auction. (Prices aren't disclosed for pre- and post-auction sales, so we can't analyse them). It's long been suspected that this is where many of the bargains are picked up though. So we'll revisit this later.
4. Buying at auction is more capital-intensive
The biggest barrier to getting on the housing ladder is the amount of cash that it takes.
If you're reading this, you've probably finally made it, and have built up enough of a deposit to buy your first home.
When it comes to buying at auction, the bad news is that the process is very cash-hungry.
Here are three ways process of buying at auction costs more than buying through an estate agent:
- Expensive due diligence. As we covered earlier, with the auction process you have to do your due diligence before bidding. That means paying a solicitor to review the legal pack, and having a survey done before the auction. That's around £500 of due diligence... but you might not even win the house. You might need to do this on 3 or 4 properties until you manage to find one that passes the due diligence, and that you can purchase at a price you're happy with.
- Extra fees for buyers. When you buy through an estate agent, it's the seller who pays their fee. With auctions, the buyer almost always has some fee to pay too.
We mystery-shopped 29 auction houses and nearly all of them (27/29) charge the buyer a fee directly - called the "buyer's premium". The average was around £975+vat, but could be much higher. (For example, properties sold by modern auction usually have a minimum buyer's fee of £6,000, but they may charge up to 3-4%+vat).
Note that you'll have to pay stamp duty on this buyer's premium too... another few hundred pounds in many cases.
- Risk of losing deposit. It's not just a few extra hundred pounds here and an extra few thousand there when you buy through auction... As we covered earlier, you also run the risk of completely losing your deposit if you win a property auction and can't complete for some reason. This could set you back years in your journey towards buying your first home.
5. Auctions attract "problem properties"
When I bought my first home, I remember we moved in and had to do a bit of work. We had to paint and redecorate, get some new floors and carpets, get a new kitchen...
It sounds straightforward, but I couldn't believe what a faff it all was. And it took ages. It was really pretty stressful and disruptive.
...And that was a for a nice flat that didn't actually need much doing!
I can't imagine what it would've been like if our first property had been something that needed real work doing.
Well, that's what you'll often find at property auctions. They attract more than their fair share of "problem properties".
The scary thing is that they may be problems you can see with the naked eye... For example, maybe the house is derelict and needs a huge amount of work. However, some problems are ones you can't see...
- It can be hard to spot subsidence...
- Those nuisance neighbours may be out during the time of your viewing...
- Serious legal issues can often only be picked up once you pay your solicitor to start digging through the paperwork...
These are all serious, costly problems to walk into. So a property could seem totally fine on the surface, but actually be a real money pit.
Auctions attract way more than their fair share of these types of "problem properties". Walking into one of these situations, especially as a first time buyer, could be disastrous.
Failing to carry out proper due diligence on auction properties is one of the biggest mistakes that auction buyers continue to make.
In my article about the 12 pros and cons of buying at auction, I said that "Buying at auction is like playing the property game on hard mode", and it couldn't be more true. The risk of picking up a scary problem property is one of the main reasons for that.
If you decide to forge ahead with auctions, just make sure you do all your due diligence before you bid.
Ok... in this section we've covered all the disadvantages of buying at auction as a first time buyer. But it can still be a good way to buy. So in the next section we'll cover how to proceed if you still want to buy at auction.
Section 2: My advice for FTBs who want to buy at auction
Ok, let's say I haven't talked you out of buying at auction by raising all those red flags in section one. How could you proceed?
1. Avoid auction if you can!
I really stand by this. It can be tempting to try auction to bag maybe £10,000 in free equity. But it's going to be difficult, you might not find a property you love, and you run real risk of walking into a money pit. As a worst case scenario, you may even lose your deposit, and could face more penalties on top.
With almost 50x more choice buying through estate agents than via auction, my first piece of advice would be to really ask yourself... do you really need to buy at auction?
If you want to move forward, read on!
2. Assume "problem property" until proven otherwise
The scariest thing about auctions is that they attract more than their fair share of these "problem properties". That's where you can lose tens of thousands of pounds, and push your first home purchase back by years.
So go in with your radar up, and be on the hunt for "red flags". The safest approach I'd recommend is to assume everything is a problem property until your due diligence proves otherwise.
3. Do full due diligence
When you find the property you love, do full due diligence. This will cost a few hundred pounds, and it'll feel like money down the drain if you don't end up buying the property. But just see that as the cost of being in the auction game.
Trust me, I've spoken with a lot of people who've lost tens of thousands of pounds because they chose to save a few hundred quid on due diligence. It's just not worth it.
Here's what a minimal amount of auction due diligence looks like:
- View the property. Go and see it. (This sounds obvious, but many people continue to buy auction properties without seeing them first). Zoopla have a great downloadable checklist for all the things to keep an eye out for.
- View the property again. I always recommend this. Ever watched a film a 2nd time and noticed things you didn't pick up the first time around? It's the same with properties. When you're about to shell out this much money, it's worth taking another visit.
- Get a survey before auction. Yes, you can get a survey on an auction property. In fact, it's highly recommended. If you get a survey after the auction and it picks up serious defects, there's no pulling out. So get the survey done first. (And if the property needs work, obtain quotes from at least 2 builders. This will help you figure out your maximum bid for the property later on).
- Have a solicitor review the local pack. Auction due diligence happens before bidding. This includes the legal aspect. The seller's solicior will compile a "legal pack" for interested parties. Have a solicitor review this for you. (Need an auction solicitor? Email me at firstname.lastname@example.org with the subject "Auction Solicitor" and I'll come back to you with a recommendation).
4. Work out your maximum bid
This is one of the most important steps. You need to workout your maximum bid for the property.
Broadly speaking, this is how you figure out how much you can afford to pay for a property at auction:
- Start with cash. How much cash do you have? Next we subtract the costs.
- Fees. That how much cash are you going to have to lay out? Check the auction small print & special conditions to find out the auction fees you'll need to pay. Then add your legal fees, stamp duty, mortgage broker fees (if you have one), moving costs etc.
- Refurb costs. How much is the property going to cost you to renovate? Ideally you'll have quotes from a couple of contractors - especially if the survey identified lots of work.
- Reserves. Whatever your fees and refurb costs are, add at least 10% for unexpected costs.
- Buying with auction finance? If you're using auction finance, make sure you budget for extra arrangement fees and the high interest payments.
- What's left? Whatever you have left is your deposit.
Are you buying as a cash buyer? If so, this remaining amount is your maximum bid.
Are you buying with a mortgage or auction finance? If so divide by 1 minus your loan-to-value.
For example, say you've got £20,000 remaining after all those costs. If you're getting an 85% mortgage/auction finance, then you'd do £20,000 ÷ (1-85%) = £20,000 ÷ 15% = £133,333. This is your maximum bid.
Of course, just because you can afford to pay that much for the property, it doesn't mean you should. Do some research online to try and value the property. If you think it's only worth £120,000, then you don't want to pay £130,000 just because you can!
If you've found the property, viewed it, carried out all your due diligence, gathered all your costings, and worked out your maximum bid, then you're ready to go!
Check out this article for auction day tips:
One word of advice... don't exceed your maximum bid. And don't underestimate how difficult this is. The auction process has been developed over thousands of years with one goal in mind: To get buyers to pay the highest price possible. You know your highest bid, so don't exceed it!)
Bonus Tips... (Pre- and Post-Auction sales)
One of the biggest advantages of buying at auction is that the person selling is usually more motivated than usual to get a sale done.
Maybe it's a property they've inherited, maybe it's one that's been giving them a headache for ages... Whatever it is, there's some reason they chose to sell at auction.
As a first-time buyer, you can try and work this to your benefit in two ways:
- Pre-auction sales. It's possible to buy a property before it goes to auction. This is where some of the best deals are done. The seller saves having to wait until auction day, and they also avoid the risk of it failing to sell on the day. Many sellers also like the sentimental aspect of selling to a first-time buyer who's going to love the property they way they once did. Be clear about your situation when you speak with the auction house.
- Post-auction sales. Not every property that goes to auction sells successfully. As a seller, it can be really disappointing seeing no one snap up your property on the day. Many sellers are much more prepared to lower their expectations to try and get a sale done at this stage. Approach the auction house to find out if the property is available, and try to negotiate yourself a purchase.
And that's it!
I hope this was a useful guide. If you're looking for further reading, I'd suggest checking out this article: Want To Buy At Auction? 12 Crucial Pros & Cons to Consider First
By Matthew Cooper, Co-Founder of Home Selling Expert