What are the pros and cons of purchasing property at auction?

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  7. What are the pros and cons of purchasing property at auction?

Property in the UK has always been highly sought after, especially as the demand for affordable housing continues to soar. However, if you’re a property investor or a buy-to-let landlord, purchasing property at auction may present a cost effective way of stepping on the property ladder or expanding your portfolio. But as always, you must always exercise due diligence. After all, wallpaper can hide a multitude of imperfections. So if you’re not careful, that bargain property you’re eyeing could turnout to be a money pit. Therefore, in order to help you make an informed decision, here are the pros and cons of purchasing property at auction.

What are the pros?

For many property investors and buy-to-let landlords, auction houses are very often the go-to place when it comes to expanding your portfolio. To understand why, some of the most popular reasons for purchasing property at auction include:

  • It’s quick: Purchasing a property is often a fast track process, giving those with the necessary the ability to pay immediately or within 28 days (depending on the court). This also gives you ample opportunity to apply for finance in order to support the expense, in particular Auction Finance which is a type of Bridging Loan.
  • Potential bargains on offer: by going to an auction rather than the open market, you do have the potential to spot a potential bargain providing you carry out the all the necessary checks and conduct thorough research. Plus, you may wish to pay particular attention to properties that may not be mortgageable, such as: derelict properties, properties lacking kitchen and bathroom facilities, short leasehold properties (under 70 years), severely damaged properties (e.g. fire damaged) to properties valued at £70,000 or lower.
  • Less competition: Because you’re going through an auction rather than the open market, you’re only going to be contending with other property investors and buy-to-let landlords. This could mean less competition, but you should always be aware of your bid limit and whether it’ll allow for enough profit after everything is said and done.

What are the cons?

Meanwhile, there are plenty of bargains and benefits to be had, you still need to tread carefully before placing a bid. So to help you gain a property that you desire and make a profit, some of the aspects you need to be aware of when purchasing property using this method are:

  • Due diligence is required: You should also always consider your position carefully before placing any bids. As well as the cost of the property, you need to take into account the cost of surveys and any legal requirements which can run into thousands of pounds, if you’re not careful.
  • Comparing properties takes time and effort: As well as the main property you wish to purchase, you should also consider looking at other properties in case you’re out bid. However, this takes time and effort since you’ll need to conduct multiple surveys and inspections. Yet in spite of this, a rule of thumb is that you should never purchase property without assessing its condition first, using a qualified RICS surveyor.
  • Prices can rise quickly: When purchasing a property at auction, you must always set a maximum bid limit since prices can rise quickly. This is especially true if you’re bidding against someone who is new and unfamiliar with the property sector.
  • You need to make a deposit: If you’ve made a successful bid for a property, the auction house will require to make a deposit on the day. This takes into account a set percentage of the property’s purchase price, which could be in the region of 10%, depending on the auction house. However, if you’re short of cash, this could be an issue without the necessary support. But, there is a solution.

What is Auction Finance?

If you’re are considering purchasing property, know that many professional property investors often choose to apply for Auction Finance, which is a form of short-term Bridging Loan. It works by you approaching a lenders and describing the type of property you aim to purchase, as well as your maximum bid. As such, you can only bid up to an agreed amount for specific certain type of property, otherwise the lender will not support the expense. Plus, you also have to explain to lenders how you intend to raise the necessary. (For example: are selling or refinancing a property in your portfolio?) This is a vital as aspect to consider as it will determine whether an Open or Closed Bridge products is appropriate.

  • Open Bridge: requires you to settle the Principle (capital borrowed) at an agreed period, which also determines when the agreement matures.
  • Closed Bridge: one the other hand requires you to resolve the Principle and the agreement by a set date.

Meanwhile, you now the matter of interest, which can be tackled in 3 different ways. These: Monthly Interest Payments, Rolled-Up-Interest and Retained Interest.

  • Monthly Interest Payments: require you to make monthly interest payments until you’ve paid the principle (the agreement has matured).
  • Rolled Up Interest: takes the Principle and the total amount of interest that’s been generated, requiring you to resolve them both in a single repayment once the agreement matures.
  • Retained Interest: allows you to borrow some of the interest that’ll be incurred for an agreed number of months, which is also charged interest. However, this kept by the lender and acts of buffer. So whilst make monthly interest payment you happen to fall behind on a particular, this will be used to pay it in your stead. Once the agreement matures, some lenders may also reimburse you a portion of the funds that you did not use.

Thinking about purchasing property auction?

Whether you’re experienced or new to the world of property investment, pursuing your goals in this sector isn’t easy and can be frustrating at times. But if you’re looking a for cost effective way of starting your portfolio or are intent on expanding into new locations, purchasing property at auction could be key to success. Nevertheless, placing a successful bid at auction can still place a tremendous strain on your finances. But, rather than depleting your cash reserves, you could take another route and apply for Auction Finance. All you have to do is source a lender who can accommodate your needs.