Purchasing commercial property at auction (as opposed to the open market) can seem like an enticing opportunity and an effective way to secure a good deal, fast. With this acknowledged, auction purchases do not come without their risks, and it is vital for any purchaser to have a solid understanding of the potential pitfalls before proceeding with an auction purchase. For sellers at auction, the risk is much lower given properties are essentially sold 'as seen' with little to no warranties often provided. The main advantages and disadvantages of auction purchases are considered below.
Advantages of purchasing at auction:
- Auction houses often list commercial properties below their typical market value, meaning that it can be the perfect place to secure a good bargain.
- A purchase transaction through an auction will typically complete much faster than a traditional property purchase on the open market. After the auction date, there is often a time restraint (e.g. 28 days) placed upon completion, which accelerates the conveyancing process which can be notoriously lengthy.
- As there is no room for prolonged negotiations and there are limited opportunities to raise due diligence enquiries, unexpected delays can be avoided providing a fast and efficient buying process.
- Auctions can often provide greater transparency due to their set pricing structure and the ability of bidders to see what others are offering.This allows potential buyers to make informed decisions about the price that they are willing to bid on any specific property.
- Once a successful bid has been placed, the purchase becomes legally binding. This provides greater certainty and reduces the risk of deals falling through unexpectedly prior to concluding missives.
- Auctions often feature a diverse range of properties, including distressed properties and repossessions, which may not be advertised elsewhere. This can provide excellent opportunities for investors to diversify their property portfolio.
- There is also the potential for high returns on investments, particularly when purchasing tenanted properties that offer an immediate stream of rental income.
Disadvantages of purchasing at auction:
- Due to the competitive bidding environment, bidders could end up paying above the property's true market value, where competing bids drive up the price. It is important to conduct thorough market research prior to the auction date in order to avoid overpaying for a property at auction.
- While legal packs are typically available in advance of the auction, there is limited opportunity to conduct comprehensive due diligence checks beyond this. Therefore, issues such as legal disputes or outstanding debts may remain undiscovered, leaving the buyer bound by a legally binding contract to purchase the property regardless.
- The fact that there is no room for negotiating the terms of the purchase and the immediate binding nature of the auction contract can be disadvantageous if new issues or information subsequently come to light. In that instance, there is no room to alter the terms of the contract or to back out of the deal without facing some legal and financial penalties.
- Properties at auction are often sold as seen, and therefore, buyers are accepting the property in its current condition, and the extent of any title issues, structural issues or required repairs and renovations may not be fully understood until after the purchase has been completed.
- There can be high upfront costs associated with auction purchases, and you are usually required to pay a 10% non-refundable deposit immediately after placing a winning bid. It is also important to be aware of the auction fees themselves.
- The fast-paced nature of auction purchases can create added pressure, and if the completion deadline is missed, the purchasers risk losing their deposit and the property itself.
While there are advantages to purchasing property at auction, it is important for any potential purchaser to carry out thorough due diligence and market research beforehand. Understanding the potential risks is crucial, and anyone who is considering an auction purchase should always seek professional legal advice before submitting a bid and creating a binding contract.
If you are considering purchasing commercial property at auction, seek professional legal advice to safeguard your interests and make informed decisions before placing your bid. It's essential to equip yourself with the right knowledge and tools to navigate the potential risks and rewards. With the right preparation, you can take advantage of the unique opportunities that auctions offer. Remember, being well-informed is key to making a successful bid. Start your journey today and ensure a successful auction experience by calling our Commercial Property team at 0141 221 1919. We take the time to understand your unique situation, address your concerns, and provide tailored solutions that make a real difference.
