Characterised by sometimes unloved properties at knockdown prices, auctions can appear to be dominated by investors and cash buyers looking for an asset, not a home. A well-organised first-time buyer who can act fast and hold their nerve could get lucky, but there are challenges.
What’s the story
Properties listed for online auction sometimes have a back story. An online auction brings a quick sale and there is usually a good reason the vendor needs it. It could be that they, or their bank, need to cash out quickly. If there is an issue with rising damp, a sitting tenant or a niggle with the title, online auctions can attract more seasoned cash buyers with the experience and the resources to sort things out.
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Selling at auction tends to weed out the faint-hearted. Typically, once the gavel drops, the house is sold. A legal and binding contract has been formed: if you are the successful bidder, you are legally obliged to complete the sale. This avoids the protracted “sale agreed” process, where an estimated 20 per cent of purchasers back out. Veterans of online auctions know the drill. They tend to be finance-ready, they’ve seen these issues before and aren’t put off. Their focus is on turning that ugly duckling into a performing one. A clutch of urban apartments, a dilapidated house with a potential site or two, a vacant retail unit – they can spot a diamond in the rough.
So is there anything here for the first-time buyer? There are a few properties at BidX1’s next sale, on November 5th, that could fit the bill. Take the semi-detached, four-bedroom house at Deepdales, Southern Cross, Bray for €425,000 – it looks a bit scuffed, but the price is appealing.
A similar house a few doors down, though with a converted attic and manicured garden, sold by private treaty for €535,000 this month. What about a two-bed semi-d at Cavalry Row near Stoneybatter for €320,000? Within walking distance of the city, the price will be within reach of some first-time buyers.
Both of these are for sale “unconditionally”, which means the successful bidder immediately enters a legal contract and must pay up. They either do so with cash or can arrange finance quickly. That’s not so easy if you are a first-time buyer needing to finalise things with your bank. However, some properties on online auction website BidX1 are now being marketed as “subject to finance” – this means the property is being sold subject to the buyer being able to draw down finance. It gives a buyer a bit more wiggle room.
"When a ['subject to finance'] property goes to the highest bidder, that bidder now has a period of time to get their finance in order; for the bank to provide a loan offer," says Jonathan Fenn, a director and head of Ireland with BidX1, who adds that the bank also has to do a valuation. However, the period of exclusivity given to the highest bidder is just four weeks so any non-cash buyers will really need to have their ducks in a row.
Competition
Surely a first-time buyer will be outbid by the cash-rich investor anyway? Well for some properties in an online auction, investors don’t bite. Fenn says his company knows by looking at a property exactly who will.
“If a property needs major works done to it, if it has a slight title issue or there might be a tenant living in it, that’s perfect [investor or cash buyer] auction stock. But if it’s something that’s a three-bed semi in south Dublin, it screams owner-occupier or first-time buyer. Certainly down the country in the more rural spots, there are owner-occupiers and family homes.”
While in Dublin and other urban centres there can be competition from investors, owner-occupiers can and do win out, he says.
“Investors aren’t as emotionally attached. They are looking at it from a business point of view. They go to a number; if they get it, great. If they don’t, they move on to something else.”
Indeed, although a property may be in a rentable area at a good price, some investors may not be interested in a one-off punt anymore. Small-time landlords are leaving the rental sector in droves, figures show. High tax, rent controls and increasing protections for tenants are making it unworkable, they say. For every two landlords selling, only one is buying, according to figures from Sherry FitzGerald this year. It's no wonder auction sites are tweaking things a bit.
“If we want to make this process more mainstream, we are going to have to bring every buyer into it, rather than keeping it for cash buyers and investors only,” says Fenn.
Interest during the marketing period determines whether a property will be sold “subject to finance”, says BidX1. If it feels there is strong interest from financed buyers, the company will change the terms and conditions of the sales process.
What’s the process?
Online auctions invert the sales process somewhat. When house-hunting in the traditional, private treaty, way getting “mortgage approval in principle” is the first step. When you find a property you like, you may view it a number of times, outbid some other suitors before going “sale agreed” and paying your deposit, which is refundable until you sign contracts. Next, you typically engage a surveyor to check the property is structurally okay, and a solicitor to ensure there are no issues with the title. If a complication is discovered, you could be right back to house hunting again. A big difference with an auction is that the legal documentation is made available upfront – so due diligence is done by your solicitor before you bid, not after. This makes sense when bids are binding and timelines are tight.
If your solicitor and surveyor are happy and you want to bid, you pay a bidding deposit based on the reserve price of the property – on a house with a guide price of €425,000 the deposit is €7,000, for example. This is refundable if your bid is unsuccessful. The property won’t be sold for less than the reserve price and the site sets a default bid amount.
Unlike the private treaty process where an estate agent mediates bids, online auction bids are logged and displayed to all bidders in real time. If you are the winning bidder in a “subject to finance” sale, you’ll need to get things sorted sharpish.
“If you don’t have your finance sorted in three or four weeks, the seller has a decision to make,” says Fenn. “Do they continue with this purchaser to give them more time, or do they go back to the open market?”
Importantly for potential purchasers, in a “subject to finance” sale, a buyer’s bidding deposit is refunded if finance is not secured.
Due diligence
When it comes to buying at auction, time is a big issue, warns Caroline Browne, partner at Browne & Murphy solicitors in Limerick. There is often a short window between when a property is advertised and the auction date. Thorough investigations, however, take time.
A planning search, which shows all planning permissions for the property are in order, can take up to 14 days, for example. An engineer must be satisfied that the house, gardens and septic tank (if any) are contained within the boundaries of the map. Taking the time to make local enquiries can reveal neighbour disputes. Some issues may be acceptable to an eager buyer, but they could jeopardise a property’s future sale, says Browne. If there are shortcomings, the bank can decide not to lend. “It’s often very hard to get an answer from the bank because of the short timeframe.”
Where a bidder is successful, the closing date for completing the sale for online auctions is very tight, notes Browne. “It’s often three weeks from the date of the auction, which is not a long time. Due to the delays with loan offers issuing from the banks at the moment, it’s an issue.”
The process is pressured, and expensive if things don’t work out.
“If you end up surveying several properties to find they are not suitable, or out of budget due to necessary repairs, or you are outbid, it can be very costly,” she says.
Bring your surveyor to the viewing before bidding, says chartered building surveyor, Noel Larkin of Noel Larkin & Associates.
“At online auctions, it wouldn’t be unusual to come across fairly significant things that are wrong,” he says.
“Finishes that are half-complete, insulation in the attic, fire-stopping in party walls – these are things you won’t spot on a quick walk around.”
If you are buying a home in a multi-unit development, a surveyor will spot whether big-ticket items like lifts, pumps, fire alarms and ducts are in good order.
“If you are buying at auction, you need to go in with your eyes open. A survey will help to make an adjustment to your bid.”
Finance
It has traditionally been unviable for first-time buyers, or any purchasers relying on a mortgage, to buy at auction, says Joey Sheahan, head of credit at MyMortgages.ie. Contracts are usually unconditional with tight timelines for completing the purchase. Most banks would not complete a purchase that quickly, he says.
If the property has a good, marketable title and complies with all planning and building regulations, it is possible to purchase at auction using a mortgage.
“But realistically, any auctioneer selling property at auction should allow a completion time of 10-12 weeks to allow a purchaser ample time to draw down the mortgage,” says Sheahan.
Some banks such as Avant Money and Haven will consider lending, he says. Moreover, a spokeswoman for ICS Mortgages says that while the lender does not have a specific product for auction buyers, it does work with those interested in the auction market.
For first-time buyers drawn in by prices on online property auction sites, due diligence is key.
