The Pros and Cons of Buying a Property At Auction
Buying a property at auction is gaining a lot of popularity, not only among property developers and investors, but homeowners as well. In fact, around 40% more property of value was sold at auction in 2022, compared to 2019. The speed of the process, the convenience and a chance of getting a bargain – it’s clear to see why. Auctions are a great way to grab excellent property deals, but one should be aware of all the risks that are associated with it.
Real estate auction involves the public sale of property that may have gone through mortgage foreclosure, have unpaid homeowner association fees, have unpaid property taxes or estate sales. That means there are good chances of finding a property that is in good shape and have more amenities than you would otherwise be able to afford.
Auctions are either conducted online or in person. So, if you have decided to buy a property at auction, it is important to weigh its pros and cons, so you can figure out whether or not purchasing a home at auction is a good idea for you.
3 Pros of Buying a Property at Auction
1 Most likely to find a bargain
Perhaps, the biggest benefit of buying a home at auction is you can buy it at a considerable lesser price than you would through traditional real estate buying process. That is because auction firms take only those properties that are discontinued for any reason and are priced attractively. Usually, you can expect 10 to 20% lower than the actual price. That means, you as a buyer have the opportunity to grab a great bargain.
Theoretically, auction lets you purchase a property for as low as the amount owed to a mortgage lender, tax authority or the HOA, which might be only a few thousand pounds of a home worth few hundred thousand pounds. Once you make sure that the property is suitable for you, then the chance of getting a bargain at auction is real. However, note that not every property that is listed at auction is a bargain. So, figure out what maximum price you are willing to pay and stick to it.
2 Fastest way to buy a property
When you purchase a property through a real estate agent, there are no deadlines to meet, so things can just delay indefinitely. That is because all the due diligence is carried out after you agree on a price with the seller. Moreover, in between the process if the seller finds a better buyer, they may sell the property even without informing you.
On the contrary, real estate auction is the fastest way to purchase a home. In this process, the due diligence is done before the auction day. Moreover, as soon as you win the bid, you pay 10% of the bid amount, sign some documents, and the home is yours. The rest of the amount needs to be paid within 28 days. Meaning, you will not miss out on the purchase, and become a homeowner the very same day.
3 Seller cannot back out
There is nothing worse than spending time and money on researching a property and finally agreeing to purchase just to realise that the seller backed out later. This is a common occurrence and could happen to anyone. House sales fall through because of many reasons, such as sellers getting a higher price than yours, they lost their onward purchase and decided to stay put, or they simply changed their mind.
With auctions, there are no such risks. As soon as the hammer slams, it creates a legal contract between you and the seller. Neither you nor the seller can back out for any reason. Therefore, it is essential to be mindful while placing the bids.
3 Cons of Buying a Property at Auction
1 You need your finances ready
As soon as you win the bid, you will be required to pay the 10% deposit amount there and then, and the remaining amount within 28 days. This isn’t enough time to arrange a huge amount of money unless you plan on taking bridging loans UK, which is the only feasible way to raise funds. In addition, you also need to make sure that you don’t miss out on the payment otherwise you will be charged with heavy penalties.
That means before you reach on the auction day, you must have the proper finances in place. There are specialist bridging finance quote providers that help you arrange funds as quickly as within a few days, so you can complete the auction property purchase before the deadline and avoid any penalties.
2 It is easy to get tempted and bid over budget
Going over budget is the biggest risk for potential buyers. As the bid value goes up, it is easy to think ‘what’s another £1000 would make a difference?’ It is easy to get carried away and bid much more than you could actually afford.
Therefore, before you enter the auction room, be prepared with how much you are willing to bid and stick to it. Small increments sum up to a large amount and you could easily find yourself in stressful financial condition if you don’t stay mindful about your bids. Remember that once the hammer slams down, there is no going back. Thus, the auction is not right for you if you are not disciplined about your budget.
3 You may not actually know about the property’s condition
Buying a property at auction is riskier than you think. Property auction often involves defective properties with improper covenants, structural damages, short leases and other issues. The properties are sold ‘as-is-where-is’. Furthermore, you may not get adequate time to conduct surveys and check legal documents of the property.
Often sellers disclose only those problems that are visible to the naked eye, while leaving other problems for you to discover yourself. If you miss finding out any repairs or leaks, you may need to spend extra money to fix them. This way you will lose the added cost advantage of buying a property at a lesser than market value price.
If you keep these pros and cons in mind, you can successfully buy a property at auction. But, the situation can really turn upside down if you fail to understand them. Therefore, before you participate in the property auction, make sure you decide your budget, familiarise yourself with the bidding process and formalities, and physically examine the property for any problems. If you do your research well and follow the best practices, you can grab a great deal and purchase the property way faster than the traditional process.
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