Buying a house or a flat through an auction can often be a tempting prospect, particularly at a time when interest rates are at a record low and property prices have been increasing. The properties listed on auctioneers' websites often advertise very low prices, quick settlement and the potential for a high return on one's investment where the property is tenanted. Where a buyer conducts the appropriate level of due diligence they may well come away with a good deal. Many buyers will view a property that they are intending to bid on, conduct legal and surveying due diligence, make a successful bid and come away with a property that they are very happy with. However, where a buyer rushes into the purchase they may find that they have paid a large sum of money for a property with a lot of serious hidden surprises.
Anecdotally, most potential buyers come across an auction property on the auctioneer's website. There will usually be some pictures, a description, a "guide price" and the option to submit an offer. There are two crucial matters to bear in mind if you find yourself tempted to click the 'submit an offer' button.
Firstly, whilst the auction company must abide by certain rules (although not the oft-quoted Property Misdescriptions Act 1991, which has been repealed) they are acting solely in the seller's interest.
Secondly, it is possible for a buyer to enter into a binding contract to buy the property – and pay a large deposit and the auctioneer's fees – before any input from solicitors or surveyors. Solicitors are usually then instructed by both parties to deal with the legal side, but they will be bound by the terms of the contract that the buyer and seller have agreed. These terms are to be found in the "General Conditions of Sale", and any "Special Conditions" noted to be incorporated, and make for scary reading for a potential buyer.
Some auctions do include legal packs, but some do not. The availability of these packs is irrelevant where a buyer and seller have concluded a contract before the buyer involves a solicitor. When solicitors are instructed to purchase a property they will carry out a large amount of checks to ensure that the buyer will receive a legally "good" title. These searches include, amongst other things, checking that:-
The seller actually owns the property
This may seem obvious, but this problem can arise in more circumstances than just a person trying to sell the same property to more than one person. For instance, where someone has died and left the property to someone in their will, and that person is now trying to sell the property, there are various pieces of evidence required in order to ensure that the buyer actually gets a good title.
The seller has capacity to sell the property
This is particularly important where the seller is a company, partnership or LLP. Only certain people within these bodies will have the power to bind the body, and so ensuring that such a person signs the disposition – which is the first step in transferring ownership to the buyer – is crucial.
There are no external matters that could frustrate the sale
This problem can arise where a seller has been sued by a third party and a court has granted an inhibition against the seller. What this means is that the seller cannot voluntarily sell property after a certain date (depending upon when notice is given to the appropriate register). The first that a buyer might know about this is when they receive a letter from solicitors acting for the person who sued the seller stating that they are going to court to have your purchase made void. The buyer would then need to chase the seller to get their money back. There are other matters that can similarly affect the sale, such as floating charges or situations where the partner of a seller would also require to consent to the sale and waive their occupancy rights in the property.
The property is not too close to an old coal shaft and has not been suffering structural damage
Scotland has a long history of coal mining, and a lot of towns and cities have coal shafts scattered about. These shafts will not have been used in a long time, but can damage nearby properties.
There are no statutory notices against the property
Even if you do manage to get a good legal title to a property, you may still find that there are statutory notices affecting your title. These have been inserted by third parties in order to compel the previous owner to pay money for works – factors, for instance, often use these where an owner is not paying their share of common repair costs. If these are registered against the title within certain timescales, the buyer can unwittingly become liable for these costs, which can easily run into thousands of pounds and what looked like a good bargain can turn out to be a financial disaster.
In a normal house or flat purchase all of these issues, and many more, are resolved before there is a binding contract. This means that if a solicitor's investigations reveal that the seller is inhibited, the property's garden is built over a coal shaft, or there are several statutory notices against the property, the buyer is able to walk away without being compelled to complete the purchase.
Where a buyer has concluded the contract for the purchase before these checks are done then they may find that they are stuck in a contract to buy a property that is not the bargain that it first appeared. Whilst it is appreciated that the "normal" conveyancing process (that affords the buyer the most protection) is not usually possible for properties advertised for sale at auction, anyone thinking of making an offer would be well advised to first instruct a solicitor to carry out checks that will reduce a buyer's potential risk, and thereby increase the value of the investment.
In summary, there is nothing intrinsically wrong with buying a property at auction. A buyer can come away with a bargain, but the onus is on the buyer not to rush into the purchase without first doing their homework.
This article relates to buying property in Scotland and is for general information only. Nothing in this article should be taken as legal advice. If you have any queries on the content of this article please contact us.
