What happens if you win a property auction but can't pay?

Bidding on a house at auction is one of the biggest thrills in property. That's why thousands of hours of TV have been dedicated to it.

But when that hammer falls, reality sets in and you actually need to pay for the place. But what happens if you win an auction and can't pay?

If you win a property at auction and can't pay you'll face legal consequences and financial penalties. This is because auction sales are legally binding once the hammer falls. You'll be liable for your 10% deposit, and the seller can even pursue you for other costs on top.

The exact amounts you'll be liable for will vary depending on the auction house you've bought through, and the circumstances of the seller. The penalties can include having to pay the seller for damages, and even depreciation, depending on what happens in the future.

We've covered everything in more detail below.

1. What happens if you win an auction but don't pay in time?

There are two payments you make when buying at auction: 

1. Auction Day: Deposit or reservation fee. This is what you're obligated to pay on auction day. It's usually 10% of the purchase price. However, if you're buying through a Modern Auction it's less. Around 2-4% of the purchase price is typical, subject to a minimum of £5,000+vat.
2. Completion Day: Rest of purchase price + fees. Each lot at an auction will have a completion deadline attached to it. It's usually 28 days, but can be shorter or longer. You need to pay the rest of the money for the house, plus any fees, by this deadline.

Related: How long do you have to pay after an auction?

1.1. What if you can't pay the deposit or reservation fee? 

It's set out in the Sales of Goods Act 1979 that "A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner".

In layman's terms, this means the auction hammer really does have special powers to create a legal contract when it falls... A contract you would be in breach of if you don't pay the required amounts straight away.

If you can't pay the deposit or reservation fee on auction day, or decide not to, the auctioneer and seller can sue you for the amount you need to pay.

It's not really a battle you can fight either, because it'll all be set out in black and white. By participating in the auction you've already agreed to the terms.

As outlined by PropertyMark, the leading membership body for the property sector: "If your bid is successful, you will be required to sign the contract and pay the deposit there and then... Pulling out of the sale after this could result in huge after costs."

In short, if you don't pay your deposit or reservation fee then the auction house or seller's solicitor can start proceedings against you to extract the amount due.

All in all, it's not a good position. Unfortunately though, your liabilities might not end there.

1.2. What happens if you can't pay the money to complete?

Once you've won the auction, you've usually got 28 days in which to complete. (It can be as many as 56 days though. How long you have to pay depends on the type of auction, and any special conditions set out in the legal pack).

But if you can't raise the funds, you won't be able to complete by the deadline.

Related: Can you get a mortgage on an auction property? [And what are the risks?]

So what happens next?

What happens if you miss your completion date?

If you miss your completion date, the seller's solicitor is likely to serve you with a Notice To Complete.

This is a legal notice which demands that you complete within 10 working days. (The count starts from the following day though, so you actually have 11 working days).

You may be able to negotiate more time on top of this, for example if your financing plans are very near to falling into place. However, there's no guarantee the seller will be open to extending the deadline.

Unfortunately, by failing to complete and then missing deadline from the Notice to Complete, things are out of your hands.

At this point, there are two heavy penalties you potentially face: 

1. You'll certainly lose your deposit/reservation fee.
2. You may even face costs for damages and depreciation.

What are damages and depreciation?

The seller sold their property to you in the auction. But if you don't complete, they'll have to sell it again. They run into a few costs (and risks) by doing this.

1. They may incur more fees for having to sell the property again.
2. It'll cost them money to continue holding onto the property while it sells. (For example, mortgage interest, bills and so on)
3. They risk selling the property for less money than they'd agreed with you.

Unfortunately, you may end up being liable for some - or all - of these costs:

Victoria Leech from Co-op Legal Services covered this topic in her article about pulling out of a property sale: 

"The seller could claim losses incurred due to market depreciation – so if the value of the property has decreased from the date the contract was breached the buyer has to pay the difference."

In theory, this means that if a property falls in value between when you originally agreed the purchase, and when the seller is next able to sell it, you may be responsible for the difference.

Consult your solicitor

All in all it can be really, really costly to not complete. This means you should really, really make sure your financing is in place, and you've done your due diligence, before you bid.

But if it's too late for that and you're already committed to an auction purchase, you should absolutely consult with a solicitor to see how costly it could be for you, and what your options are.

Recommended: Can you pull out after an auction? (and what are the penalties?)

1.3. Can you get out of an auction contract?

The issue you face is that you've entered a legal contract to buy the property by a certain date. So if you don't, then you're in breach of that contract. This means you face all the legal repercussions that come with it.

But what if that legal contract was formed on a false premise? What if the seller misrepresented the property, and that's why you bid on it? 

In this case, you may be able to get out of the auction contract.

Read more about is in our article about trying to get out of an auction contract.

This is a really complicated area of law though, and you should absolutely consult with a legal specialist if you're hoping to challenge the premise of the sale.

1.4. Arranging Short Term Finance

If you've won an auction and you know there's no way out of the contract, what other options do you have? 

Arranging short term finance, such as a bridging loan, is a potential option. This comes with its own set of issues and obligations though, which shouldn't be taken lightly:

1. Short term loans like bridging have high fees.
2. They also have high interest rates (9-15% per year is typical).
3. They have strict rules about repayments. (As well as heavy penalties for missing their deadlines).

Short term lending can be a really good solution to this sort of problem. But it can be a case of "out of the frying pan and into the fire". You should be really careful about your next steps, and consult with your solicitor and finance broker.

We'll have new guides coming soon about short term finance and auction finance. Email us to subscribe, and we'll keep you updated: advice@homesellingexpert.co.uk

Key Takeaways

Auctions are legally binding and there's almost no backing out afterwards. But buyers will still sometimes see a property in auction that they want and bid before having their finances 100% in place. They'll go ahead and win, hoping to get all the money in place ready for completion.

It's a risky strategy, and we'd generally advise against it. But we know buyers still go this route from time to time.

Unfortunately, if the financing doesn't materialise, you'll be unable to complete.

If this happens you'll be in breach of contract. You'll lose the 10% deposit (or reservation fee), and may face other costs on top.

Buying at auction without doing all your due diligence first, and without having financing in place, is extremely risky. Of course, we'd advise against taking these undue risks.

If it's already too late though, consult with a solicitor to discuss your options and find out what the damages could potentially be.