TV property shows have made the idea of buying properties at auction a lot more popular in recent years. The increased awareness of auctions amongst the property buying public (partly thanks to the popularity of TV shows such like Property Ladder) has attracted a far wider clientele to auction rooms in the hope of discovering a property bargain.
When it comes to bidding for commercial properties at auction however, there are some vital issues that need to be highlighted. Most notably of course is that buying a commercial property at auction is a completely different experience and procedure from buying off a property in the normal fashion. Below you will find a quick guide to all the major differences and vital facts and obligations you will need to be aware of for purchasing commercial property at auction.
Sellers Packs: Typically, a commercial property at auction will have a ‘seller’s pack’. Prepared by the vendor’s solicitor this will include a range of searches (environmental, drainage, local authority) as well as information on the registered title and information about any leases or service charges that are applicable. When buying at auction it is wise to have a solicitor look over the seller’s pack to check for any problems that may arise.
Instruct a surveyor: Buyers should always instruct a valuation of a commercial property before bidding at auction. Without a qualified surveyor inspecting the property, there could be major structural issues which a buyer is unaware of. If unsuccessful at the auction then this may seem like a waste of money but buyers could save thousands by seeing a valuation before bidding.
Have Your Finances in Place: If you are planning to finance commercial property bought at auction through a commercial mortgage, then you are going to need the broad agreement of a mortgage in place and ready to go if you win the auction. What you are looking for is called a ‘Decision in Principle’ which translates into they confirm they’re willing to lend the money that will cover the purchase.
From the moment the auctioneer shouts sold, you have thirty days to complete the transaction and pay for your purchase. It will be impossible to set up a commercial mortgage in that time, which is why a decision in principle is needed from a commercial mortgage lender.
You agree to a contract on the fall of the hammer: On the fall of the hammer, a contract is forged between the seller of the property and the successful auction bidder. The contract requires the buyer to pay a deposit on the day of the auction – generally around 10 per cent of the purchase price.
The buyer is also contractually obliged to complete the purchase of the commercial property by a date stipulated in the auction terms and conditions. Buyers will therefore typically have only around 28-30 days to complete the purchase in full.
Failure to complete on time: Sellers can penalise auction buyers if the purchase does not complete by the scheduled completion date. For example, a seller can ask their solicitor to serve a ‘completion notice’ at a cost to the buyer. This sets out a further short period by which the completion should be concluded otherwise the seller reserves the right to keep the deposit and rescind the contract.
Whilst purchasing commercial property at an auction might be a good way of finding cheap property. That said, the process is fundamentally different from the standard property transaction that most of us are used to and so it is vital that buyers understand the processes and potential pitfalls before they get started.
Howard O’Gollegos writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.
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