Top tips for buy-to-let landlords purchasing property at auction

Top tips for buy-to-let landlords purchasing property at auction

Investing in property at auction is a popular choice for many buy-to-let landlords as there are some good bargains to be found as well as achieving high rental yields, but as with any property acquisition, it is necessary to do your homework first and know the pitfalls to avoid. Even for the seasoned bidder, there are ever-changing rules and regulations to keep pace with.

Here are a few tips to ensure things go smoothly:

1. Check the legal pack

If you’re a professional property investor, you may have seen legal packs hundreds of times, but each one will have differences relating to the particular property. Make sure you’ve read the small print, as it’s often in these sections where surprises such as covenants, restrictions and rights of access are noted.

2. Don’t get caught out by the six month rule

Even if you are buying the property as a buy-to-let investment, banks generally will not lend on it until it has been owned for six months. However, what is not as commonly known is that the vendor should also have owned it for at least six months. When buying at auction even seasoned professionals can be caught out by this, so it’s important to find out how long the vendor has had the property, otherwise it could be an issue with a high street lender.

3. Be aware of potential issues with the property

There are some issues which will immediately make funding more difficult, such as kitchens and bathrooms which are not up to scratch and can be considered unsanitary, or Japanese knotweed which can damage the property and make it very difficult to obtain finance from traditional banks. Knowing about these in advance means you can approach specialist lenders, who are often more flexible when it comes to funding non-standard properties.

4. Check the planning consents

If there is planning attached to a property, be careful to check when it expires. If it is due to lapse, don’t automatically assume you’ll be able to get it again. Check with the local planning department what the likelihood is of renewing.

5. HMO regulation

Many buy-to-let landlords look to auctions to pick up houses of multiple occupation or HMO investments. These are growing in popularity. However, not all landlords are aware that for larger HMOs, by law, the property has to be licensed with the local council. These licences usually have to be renewed every five years and you can be fined up to £20,000 for renting out an unlicensed HMO.

6. Investigate any tenancies

Is the property you are planning to purchase tenanted? Take the time to find out some background information about both the tenant and the tenancy agreement. Assured shorthold tenancies can cause issues for finance, whilst if you buy a property with a regulated tenant, you may find you’re going to be waiting a long time for that property to be vacated, as they will have the right to remain, and usually at rents well below the market rate.

7.  Beware buy-to-let changes

As many of you will know, there have been major changes for buy-to-let landlords implemented by the government aimed at levelling the playing field between professional investors and homeowners. The first of these changes, a 3% hike in stamp duty on buy-to-let properties, came into play in April 2016 with further changes due this year. The increased stamp duty applies only to residential property though, and not commercial or semi-commercial.

8. Have your finance in place

When purchasing at auction you need to think carefully about finance before the sale. Auction buyers will usually have only 28 days to complete, and sometimes it can be as little as a fortnight.  Plus you’ll need to put down a 10 per cent deposit on the day. The short timescales can often pose problems for mainstream lenders, so talk to auction finance specialists. You can then go into the auction room with a decision in principle on a particular lot and bid with confidence up to the agreed bid price.

9. Keep calm

The auction house can be an exciting place, but don’t get carried away. If a particular property attracts a lot of interest, it’s all too easy to keep bidding but remember, once the hammer goes down you are legally committed to the property. Stick to your figures and know your bid limit. Remember the guide price is just that, a rough a guide; the property could go for under or over that price, so it’s important to ensure you don’t stretch yourself.

10. What to do when the lot isn’t sold

If a reserve price is not met, the auctioneer will withdraw the lot from the auction. However, at the end of the auction the vendor may agree to sell the property at a lower price. Ask the auctioneer if you can register your interest for such properties and you may find yourself with a last minute win.

What the experts say

Loren Howard from Prime Plus MortgagesHard Money Loans

“When looking at properties for auction it is great to have a budget and plan in mind. Always have a pre-approval amount, which most lenders can help you get. Knowing what kind of properties you want to invest in and what repairs you plan to make will be the best way to head to auctions.”

Published: January 2, 2020