Daily Mail

Like the idea of buying a property at auction, but worried about losing your deposit if something goes wrong? Here we take a closer look.

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  • The thought of buying a property at auction may be quite appealing, as you may be able to pick up a bargain and avoid the time-consuming conventional buying process. 

    While many people who purchase at auctions are seasoned property investors or buy-to-let landlords looking to extend their portfolios, there’s nothing to stop you considering this route to home ownership when buying your first home. 

    But if you are a first-time buyer, or new to the process of buying at auction, you need to go in with your eyes wide open, as there are some risks involved. One of the big things you need to think about is the deposit. 

    Paying a deposit for a property bought at an auction

    If you are successful when bidding for a property at auction, then, once the hammer falls, you are required to pay a deposit of 10% of the purchase price. 

    The sale then has to complete within 28 days, which means you are expected to pay the remaining 90% balance within that time-frame. 

    What if the unexpected happens?

    You need to be aware that when you bid at auction and the hammer goes down, this is a legally binding contract – without provision of a ‘get-out clause.’ 

    With this in mind, you must make your mortgage arrangements and have a written mortgage offer before bidding on a property.

    But what if the lender drags its feet or you lose your job unexpectedly and cannot pull the remaining funds together? Will you lose the entire 10% deposit, which could run to thousands of pounds? 

    What do the experts say?

    We asked a few property experts if they could help clarify the situation on deposits put down at auction. Here are their responses: 

    Peter Mugleston, co-founder of advice portal, Online Mortgage Advisor, says: “Unfortunately, it is usually tough to get your deposit back. Your offer and acceptance at the point of purchase is binding, and in the contract it will state that you must pay 10% on the day, which is not refunded if you pull out. 

    “It is the responsibility of the buyer to ensure they have the funds available, or that they can get them in time, before making an offer on the property. 

    “It may be that the auctioneer and vendor are prepared to offer some flexibility – or even an extension – if you can convince them that the funds are due. 

    “This is unlikely, but in the rare cases where flexibility is offered, an additional fee may be levied.” 

    Guy Nyirenda, senior broker at mortgage brokerage, Coreco, says: “The deposit you put down is not “in good faith’ as the purchase is contractually binding. 

    “You should not bid on a property at auction unless you are sure you can complete the purchase. 

    “If a buyer fails to complete, technically, they will forfeit their deposit, unless they can strike a deal with the vendor and auction house, and only be hit for fees." 

    Jonathan Harris, director of mortgage broker, Anderson Harris, says: “If you buy a property at auction, you are on the hook, and it would be difficult to wriggle out if you were to have trouble raising the balance within the tight time-frame. 

    “If you have a good case to argue as to why this is the case, the property could always go back into a future auction.

    “However, some would then argue the property would be tainted as a result of having to be re-auctioned. 

    “Any resolution may therefore result in you not getting back your full 10% deposit when the property is finally sold." 

    A bridging loan may offer a solution

    If you are in a situation where, say, your mortgage gets declined, it may still be possible to press on with the auction purchase using what is known as ‘bridging finance.’ 

    Bridging loans are a short-term funding option. In the right circumstances, this finance can be completed in just a number of days. 

    What you need to bear in mind though, is that a bridging loan can be a costly way to borrow, as this type of finance is designed to be taken over the short-term, and you should generally only consider this as a last resort. 

    Go in with your eyes open

    If you are contemplating bidding on a property at auction, all of this demonstrates just how important it is to go in with your eyes wide open. 

    Buying at auction isn’t for the faint-hearted. You need to have everything prepared in advance. If you’re not sure what you’re doing, the key is to seek professional advice. 

    There’s lots of information on sites such as Essential Information Group and UK Auction List

    Unless you’re a cash buyer, it’s also worth speaking to a mortgage broker who can help you organise your finance.

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    Have you tried to buy at auction? Let us know in the comments, below...

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