Why buying at auction is an awful idea for most first-time buyers

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Why buying at auction is an awful idea for most first-time buyers

30th September 2024: The information below was correct at the time of publication but is subject to change.

Several times a year, clients, or potential clients, will come to me saying that they have found a property and it’s a bargain. The catch is that it’s being sold at auction. This comes with some factors they usually haven’t considered. I’ll show an example of how one first time buyer lost £25,000 buying at auction.

While it is possible for a first-time buyer to buy at auction, two phrases come to mind:

If something seems too good to be true, then it probably is
Just because you can, doesn’t mean that you should

Why properties are at auction

First of all, ask yourself; if you had a property to sell, would you sell it way below the market value? Unlikely. Even if you needed a quick sale, you could probably get just under market value selling the traditional way. So why do some property owners seem to sell properties at rock bottom prices, but only via auction?

Often, it’s because the property that is being sold is un-mortgageable. This means that for some reason, mortgage lenders will not agree to issue a mortgage for that specific property.

If a mortgage cannot be used for the property this means that the only people who can buy this property are those who have cash or some other form of finance on hand. There are very few of these people around. How many people do you know that could buy a house outright? And because of this they are able to get what is seemingly a discount.

However, is it really a discount? Because if the property isn’t mortgageable when they buy it, it’s not like they can turn around and sell it at the full market price 6 months later if it’s still not mortgageable. More likely they are experienced property professionals who know how to solve the problem though usually fixing the issue will take even more cash.

What makes a property un-mortgageable?

Banks want to know that if you stop paying your mortgage that they can repossess your property, sell it, and get back the money you owe on it. If the property has some structural or legal problem, is derelict, or isn’t habitable (such as not having a working kitchen, bathroom, windows and doors and so on), then the property’s value is seriously affected. The banks won’t take a risk on this, even if you plan to sort the issue. They’d just tell you to come back when the issue is sorted.

Put in the simplest terms, banks don’t want to mortgage a home that, in the most extreme case, might fall down next week. Why would they take the risk? Why would you want to take that risk? That’s why they don’t lend on properties with structural issues.

Such structural issues are identified by the lender when they send their surveyor to value the property. This is why I suggest waiting until you’ve had the banks valuation before doing your own survey. Legal issues affecting the property would be identified by the solicitor before exchange of contracts. Read more about conveyancing here.

The risks of auction

There’s one key difference between buying at auction and a traditional sale (called sale by private treaty). With sale by private treaty, neither the vendor nor buyer are obliged to complete the transaction when an offer is accepted. This means that if you have an offer accepted on a property but later find out it is un-mortgageable you can simply walk away, nothing is lost. You could walk away for any reason so long as you haven’t exchanged contracts.

However, with an auction, once the hammer comes down you are obliged to buy the property. Think of it as exchanging contracts right away. This means that if the valuer goes round and advises the lender that there is a problem with the property, you are obliged to buy the property but now cannot get a mortgage. What catches people out is that with an auction property you will pay your deposit upfront. If you decide not to proceed, or can’t proceed, you will lose your deposit. That is the risk of buying at auction.

Case Study – Buyer loses £25,000 deposit!

I refuse to assist people buying at auctions. However recently somebody who had already won an auction came to me as they had struggled to find a mortgage due to their income being in the form of a stipend. They went on to work with an associate of mine.

The property was being purchased for £250,000 and the buyer was required to put down a 10% deposit when they won the auction. This was their entire savings. The mortgage was applied for and the mortgage lender’s valuation identified structural problems with the property which meant they would not lend. The buyer didn’t have the cash to buy the property outright, then pay to fix the problem, then remortgage, so they lost all their £25,000 deposit just for the chance to get a slightly cheaper property.

Summary

So, while it is not impossible for a first-time buyer to buy at auction, it is, in my professional opinion, not advisable. In fact, I would say it’s not advisable for anyone using a mortgage to buy at auction. Unless you can guarantee that the property will be acceptable to a lender, which you cannot, then it’s just not worth the risk.

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