IF you're trying to buy a house then you might have considered a fixer-upper at auction – but what are the risks?
We spoke to two mortgage experts to share their secrets, including how to buy a house on the cheap.
Getting on the property ladder is tough, according to MoneyHelper, generally you’d need to save at least 5% of the cost of the home you’d like to buy for the deposit.
For example, if you’re after a £200,000 home, then you’ll need to have saved at least £10,000.
On top of that, mortgage lenders will often only give you a mortgage that is between three and four times your salary – so a £30,000 annual salary could get you a mortgage somewhere between £90,000 and £120,000.
And with the cost of living crisis, people might be looking at other ways to buy or sell a property.
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If you're looking to get on the property ladder, then you may have been in touch with a local estate agent or spend hours scouring local sites.
It's very competitive, with buyers often battling against dozens of other potential home owners in order to secure a property.
That's why we've asked two experts for help, we want to know how to find a cheap home at a bargain price.
Homes listed at auction are usually cheaper than similar ones listed on the market – but buyers can lock horns in bidding wars, driving prices up much higher than the starting price.
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Dan Knott, is a mortgage and insurance adviser at Active Financial, and posts lots of tips on his Instagram page "Dandoesmortgages_".
And Jo Jingree, is a specialist mortgage adviser at Mortgage Confidence.
They spoke to The Sun to offer his tips for those considering trying an auction to buy a house.
How to find a house not listed by an estate agent
There are several ways you can find a rundown house, or house not listed by an estate agent.
Jo told The Sun that leaflet dropping can be a really successful way of finding one.
She said if you want to live near a particular school for example, it's worth dropping leaflets with your info and what you're looking for in that area, and seeing who gets in touch.
She said: "One of my clients did this – she specifically wanted to buy a house on a particular road and one of the owners responded and she bought the house!"
Dan said that if you’re looking to go elsewhere than via an estate agent, you could consider an auction house.
Houses sold at auction typically sell for 41% less than if they were sold via an estate agent, according to Proptista, so you could get a really good deal.
Of course, this varies depending on the area and you could end up paying more if the bidding takes off.
He said: “You can find the properties for sale at auction via websites such as Rightmove or Zoopla, you can then search for specialist auction listings.
“The property auction will release details of the properties that they are selling in advance of the auction and a guide price may be given.”
He added that this will help you prepare for the sale ahead of the auction – as there are things you need to do.
This may be harder than going through an estate agent, as you will be doing a lot of the work yourself, but you could end up getting a really good deal.
Preparation pre-auction is key
Dan said that if you’re planning to buy at auction, preparation is vital.
Firstly, a mortgage should already be lined up when making a bid at auction, so you’ll need to know how much you’re able to get or whether you’ll be able to buy with cash, though of course this will be harder for most people.
According to Zoopla, property buys at auction tend to be cash buyers or experienced investors – this is because auctions are less flexible and have a shorter time frame.
But that doesn’t mean you don’t stand a chance if you’re a first-time buyer and will therefore need a way to pay for the purchase, such as a mortgage.
That’s why Dan said preparation is so important: "For this reason, it is essential you speak to a mortgage adviser early to understand your budget and mortgage options and to ensure you’re in the best position possible when auction day arrives.”
If successful, you’ll be given a loan based on your income and any assets (like with a normal property purchase).
But Jo said that if the property is NOT suitable to live in right away, then you probably won't be able to get a conventional mortgage.
She said: "Often the buyer will take out bridging finance to get the property to a point where it is habitable, and then refinance to a standard mortgage."
A bridging loan amount depends on the state of the property and the finances of the buyer – make sure you consider how much this could cost you first as you won't want to be thrown with unexpected charges you can't afford.
"Bridging finance isn’t the same as a conventional mortgage and usually you need a larger deposit to put down," Jo said.
"This is a key consideration, as you will also need the funds to refurbish the property."
However, a bridging loan isn't always the best option, as they’re short term they tend to come with more risks and higher interest rates.
According to Which?, current bridging loan rates equate to an annual interest of about 20% which will have to be paid on top of the loan repayment.
The borrower will also have to pay a set-up free – this can cost around 2% of the loan being taken out.
Get the professionals in – is your property habitable?
Jo said buyers should also ensure the property is deemed habitable before buying – if it isn't, your mortgage lender may decide they can't support you.
"This means it must have running water, gas and [that the] electricity is connected," Jo said.
"It should also have a functioning bathroom, and is water-tight as a minimum – it is best to take advice from a qualified surveyor on this, as they will know the standard that lenders are looking for."
The condition of the property is really important, and is one of the main factors that a lender will consider before loaning you any more.
They’ll typically only provide you with a mortgage agreement if the property can be lived in right away, if not then you’ll probably have to find a different way to purchase.
It is best you find a property that can be lived in as you’ll stand more of a chance of getting a mortgage for it.
If you do have the cash to pay upfront, then you’ll most likely have better luck in getting a house that needs a lot of work.
Once you’ve secured how you’re going to pay and chosen a property, it’s best to get some professionals to view the property just so you know you aren’t missing out.
Dan said you will need to get a conveyancing solicitor, who should have already begun legal due diligence, though this isn’t absolutely necessary.
A typical surveyor in 2022 costs from anywhere between £400 and £1,245, so it’ll really depend on the location and property.
There are different types of surveys such as a full building survey which includes a building inspection, a full survey report and a property valuation – this could be more expensive but could provide you with better clarity before auction.
While a condition report survey is much more basic (and therefore will be the cheapest) and only includes basic information about the condition of the property.
On the day – you'll need to pay quickly
Dan said that if your bid is successful, you will be expected to exchange contracts that same day – so make sure you're prepared, or you could lose the property.
The mortgage auction completion then has a fixed time frame of either 28 or 56 days.
You will also need to pay 10% of your deposit on the day, plus an administration charge which could cost you an additional 10% of the deposit.
You will probably also need to pay a buyer’s premium which is charged by the auctioneer to cover expenses.
The amount will vary but it could be something like an additional 20% of the hammer price.
Dan said: “This is significantly shorter than a standard purchase in which completion will take four months on average.
“There is not a quicker way to purchase a property as exchange of contracts will occur on the day that your bid is accepted.”
The house will probably have issues
Houses sold at auction commonly have issues, so be prepared to pay for it to be fixed up.
It's also why they're often cheaper – however, this could mean they're damaged or have problems.
Dan refers to these types of houses as "problem properties".
He said: “This could be an issue with the building itself or legal issues – these problems may sometimes make the property unmortgageable and therefore not appealing to some buyers.”
Dan said: "It is essential that buyers understand the terms and conditions of the auction house they are using, as by placing a bid on a property you are agreeing to them.
"You must clarify the conditions attached and be aware of what needs to be paid and when."
He explained that while we already know buying a property is an expensive task, you want to make sure you don't come across any surprise costs along the way.
Of course, these properties may not be for you if your lender declined the mortgage because the house needed too much work.
Beware of the risks
In terms of what could go wrong, the expert said that a buyer could potentially lose their broker and have to pay survey and legal fees even if a bid is unsuccessful.
While the buyer may not have different rights compared to those buying with an estate agent, the process is very different.
You need to cover all ground as these houses could come with more issues, as stated above.
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Dan said: “Due to the nature of an auction, some buyers may be at a higher risk of overpaying.
“Further risks stem from a lack of preparation such as not viewing the property before buying, or not taking the time to understand the terms and conditions of the auction."
Do you have a money problem that needs sorting? Get in touch by emailing [email protected]
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