Paying A Deposit When Buying At Auction

To those who are used to buying a property through the usual estate agency route, and therefore having a long timescale in which to actually pay for a property, the immediacy of the payment process when buying at auction can come as quite a surprise.

Indeed, there have been those who have gone to auction and not realised that if they bid on a property successfully they are going to have to part with money there and then, at the end of the auction, in the shape of paying a deposit. This is a real problem for such people, because when the hammer comes down it creates a legally binding contract. This means that if you fail to pay the deposit, you could potentially get sued by the vendor.

So be fully aware that if you bid at an auction, you will need to be able to pay that 10% deposit immediately: ensure you have the funds in your bank to do so, and remember if you go above the price you had in your mind that you'll need to find 10% of any increase you make on that figure immediately too.

Given that you will need to pay the 90% balance within 28 days which is very little time, it is a good idea to engage your solicitor in advance so that this timescale does not become an impossibility. Indeed this is why it is also recommended by property experts that you have a mortgage already lined up, if you will need one to fund your purchase (which would be the case for the majority of first-time buyers).

Interestingly for first-time buyers may be the fact that a large number of people who bid at auctions are not actually looking to live in the property themselves: they are often people who have a rental portfolio that they are looking to expand, or property developers who purchase a property with an intention to do it up then sell it on, or builders who are buying land for a whole host of reasons - possibly again to make improvements then sell for a profit. Therefore people's motivations may be quite different to yours.

This can explain the apparent disparity between interest and sale price in a property and the guide price: whereas a first-time buyer wants somewhere to live and so the 'potential' of the place may be less important, a developer will very much be thinking about potential, and therefore this could make the property more attractive for them than for a first-time buyer. Likewise someone who is building a rental portfolio could be thinking just about yields, and if the yield (percentage value of the property per year) is still very attractive at a price well above the guide price, financially that could still make sense whereas it wouldn't for someone who just wants somewhere to live and isn't interested in doing much work on it.

So be sure to have the deposit arranged in advance, a mortgage if you need one, and also ensure you have been through the legal pack carefully to see if there are hidden extras. Remember you will usually have an auction house fee too and may even need to pay vendor's costs too.