While you may have already decided to buy a commercial property, either as an investment or to run your business from, have you considered buying it at auction? Auctions are becoming a very popular way of both buying and selling commercial buildings.
For those who have not bought at auction before, the idea can be a scary prospect… after all, one ill-timed scratch of the head could find you placing a bid that you didn’t plan to make! You will be contractually liable to buy the property from the moment the hammer falls, so it is important to know what you are doing.
To assist you with this process, we have created this handy guide to set out the steps, the benefits and risks of buying at auction and what you will need to consider along the way.
Benefits & Risks of buying a commercial property at auction
Purchasing a commercial property at auction can be a great way to secure a deal quickly and without too much of a fuss. From the moment the auctioneer declares you to be the winning bidder, the property is yours. The vendor won’t be able to back out of the agreement, and you will not run the risk of the deal falling apart because another buyer has put in a lower offer. There is less uncertainty, and you have a clear timeframe. Within 28 days, you will own the property.
Many of the lots that are placed for auction can have value added to them via improvements, change of use or conversion, which can improve resale values and increase the capital assets for your business or investment portfolio.
There are no surprises, as the auction house will provide all relevant documents before the auction, which often includes search packs, title deeds, leases and planning documents. These are available to download for free, so you can do your due diligence before making a bid.
There can be some great deals to be had as well, although it is important to beware of properties that are priced unrealistically low. If it seems too good to be true, there is a chance it probably is!
One more risk of buying at auction is that you can incur a lot of expenses up front, e.g. fees for solicitors and surveyors, when you may not end up owning the property. However, as we will see, these can be vital to make sure that the property is right for you.
1. Preparing to buy a commercial property at auction
The process is so much quicker with an auction than with a more conventional property purchase, so it is important to spend a lot of time in the planning stage.
If you have never bought a commercial property at auction before, it would be sensible for you to go and watch one take place so that you can get a feel for the process and the energy in the room. It would be a good idea to do this at least once so that you are not caught up in the excitement on the day.
Once you have decided that you are ready to get started, you should start by researching the location that you want to buy in. This will help you to get an indication of the price range and how much similar commercial lots have sold for in the past. Whilst the properties will have an approximate guide price, these can change during the marketing process.
You can do some research to find out what properties are currently selling at auction in a few different ways:
- An auctioneer’s catalogue is normally available at least 2-3 weeks before the date of the auction, so you can start to browse this to see what types of properties will be available.
- You can speak to your local commercial estate agent.
- Review online property portals.
The quickest way to find out which properties will be coming up for auction is via the auction house directly, as they should be able to provide both online and printed catalogues a few weeks ahead of the date. If possible, try to visit the properties that interest you in person and, if you can, visit them with a builder or surveyor so that they can identify any potential structural defects or problems that you may need to rectify in the future. They will be able to give you an idea of the repair costs so that you can go into the purchase with your eyes open. You should also make a note of any potential improvements that you could make to the property to increase the capital value.
You may wish to instruct a Chartered Surveyor and ask for a full survey to be carried out on the building. Many bidders try to avoid this cost, but it could save you a lot of money in the future if there are expensive repairs to be done. Before you instruct the surveyor, double-check with the auction house that the building is still for sale.
During your planning phase, you will also want to find a good commercial property solicitor who has experience of dealing with buying at auction and can lead you through the procedure. They will help you to avoid tying yourself to a property that does not meet your needs, or that you will have difficulty renting out to other businesses.
At this point, you will be able to download the legal pack for any of the properties that you are interested in and give a copy to your solicitor for them to review. They will, amongst other things, do the following:
- Check the title at the land registry;
- Carry out searches with the local authority. You can read more about what these will be looking for in our Local Authourity Search guide
- Review the planning documents for the building and confirm that the permitted use meets your needs. This is important, as it would be a pain to have to apply for a change of use after committing to buy the property, and there is the added risk that the local authority may reject your application. For a list of the permitted use classes, click here.
- Look into any plans for the local area in the future;
- Identify any environmental matters to be aware of, or any potential issues with the water/drainage at the property;
- Calculate your tax liability; and
- Prepare a full report to you on the property.
You should also ask the auction house for the relevant history of the building and check with a local agent to see how popular the area is with commercial renters. You could even ask for an informal rent valuation so that you can get an idea of the potential income that you could earn.
As you will be required to put a deposit down as soon as your bid is successful, it is important that you have the funds ready. This is normally 10% of the final price, and you will be expected to pay it immediately. Usually, you then have a further 28 days to pay the balance of the price and complete the transaction.
It is vital that you start sourcing the finance for your purchase. If you are not a cash buyer, you will need to speak to a mortgage adviser before the day of the auction so that you can get an agreement in principle arranged to take with you on the day. Once the property is declared as “Sold”, you cannot pull out of the transaction. You are legally committed to complete the purchase, and you could lose the deposit and be sued for a breach of the contract if you fail to go through with it. You must be confident that you have the funds available for the full final price.
Because the guide prices can change during marketing, you should have a sensible budget in place and ensure that your agreement in principle from the commercial lender allows you to borrow enough to meet the final price. You can seek advice from your mortgage adviser and solicitor about the terms of your mortgage before the auction.
The mortgage lender will normally carry out the valuation after the bid has been successful, but it is sometimes possible for this to be done before the auction and your mortgage adviser will be able to guide you on this.
Once you have got your agreement in principle, you will need to make sure that you have everything you need to take with you on the day of the auction. This will be set out in the auction pack but typically includes proof of your identity, address and income, the agreement in principle and proof of your deposit.
If your bid is successful, you will need to call your mortgage adviser to process the full application, and the mortgage offer will be issued once the valuation has been done.
3. The Auction
If you have your heart set on a particular property, it is possible to put an offer in writing to the auction house before the day of the auction. The auctioneer will then speak with the vendor. If they accept the offer, you will need to exchange contracts immediately and pay a deposit. You will then have 20-28 working days to pay the balance and complete on the purchase. If you fail to do so, the seller can keep your deposit and then place the property up for auction as they originally planned.
Instead, if you decide to wait for the auction, it is possible for you to send your solicitor or agent to bid on your behalf or place bids online or via phone. This may depend on the auction house.
Make sure that either your representative or you arrive early, as you will need to pre-register with the administration team at the auction house and show them your ID and utility bill. They will give you any amendments to the auction pack and you can check to see if the property that you are interested in is still available. You will also need your solicitor’s details to hand, as these will be required when the deposit is paid.
You will want to check the addendum to the sale to make sure that you are aware of any changes that have occurred to the property, as these will form part of the “memorandum of sale”, or contract if your bid is successful. This is the document that records how the property will be sold to you, including the final price that it has been sold for and the agreed completion date. Double-check the lot number to make sure that you know which property you want to bid for.
The auctions will normally be processed in order, and there will be a large screen at the front of the room showing the lot number as each auction progresses.
This is the time to really stay calm and logical. Do not let your emotions run away with you. Remember your budget and do not let your competitive nature take over, otherwise, you could end up paying a lot more than you had budgeted for.
If the lot that you are interested in does not meet the reserve price set by the vendor, then you can contact them privately after the auction to make an offer.
If you are lucky enough to make the successful bid, then you are soon to be the owner of that commercial property. You will need to pay your 10% deposit and the remaining balance within a set timeframe, which is normally less than a month. Because your solicitor has already done all the necessary searches and reports, completion can usually take place quickly after that.
The most important thing to remember when buying a commercial property at auction is that you need to do lots of preparation and pay for professional legal advice. This will ensure that you do not make any expensive mistakes and, instead, end up with the commercial property that you dreamed of.