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5 key due diligence strategies every auction buyer should use

Publish Date: 16 July 2019

By Beth Fox

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5 key due diligence strategies every auction buyer should use

Further reading

Why auctions offer a great opportunity but they are not for everyone!

3 strategies to maximise profit from your auction property investment

Due diligence success strategies for buying property at auction

BLOG / 7 MIN READ

Whether it is a traditional ball room style auction setting or you are bidding on an online platform it is crucial to do your due diligence so that you can be certain you know what you are committing to buying in advance of the auction. When looking to buy residential or commercial property at auction 'prior preparation' is always the key to a successful auction outcome.

Due diligence 

The term 'due diligence' refers to the task of carrying out all the necessary checks and thorough investigations into a property you are interested in. Ensuring that you are fully aware of the potential risks and associated costs in preparation to consider whether you wish to continue and pursue the property at auction and also how much you would be willing to bid for it.

Start doing your due diligence research as soon as possible in advance of the auction to give yourself as much time as possible to consider all the pros and cons to the findings and follow up any outstanding queries. If you fail to follow recommended due diligence practises you could end up owning a property that is full of surprises that may be costly to remedy or depending on what you are able to do with the property could completely alter your plans. Remember, it is your responsibility to be completely satisfied with your property investigations before the auction to help you make an educated decision as to whether to bid for the property or not and then calculate what your maximum bid should be.

How to do your due diligence

1. View the auction property
2. Ascertain the likely sale price
3. Read the legal pack
4. Instruct a property survey
5. Ask your solicitor to review the legal pack 

1. View the auction property

It is important to view every property you are interested in prior to auction. Contact the auctioneer to arrange the viewing which may be arranged as fixed time slots for group viewings (open house viewings) or individually arranged.
It may be useful at this point to bring an experienced builder or knowledgeable friend with you to the property who can spot any potential problems and works required that would need to be included in your financial calculations or may mean the property is no longer of interest to you.
 
When looking at buying any residential property it is advisable to view it at least twice, during the daytime and at night which may be just a ‘drive by’ viewing. Be aware that the plans and photographs published in the catalogue are there to aid identification of the property only and the plans may not be to scale so you would need to verify them.
 
It is vital that you realise and accept that when the gavel falls you are under contract to complete the purchase of the property and that you must be completely satisfied with the condition of the property at the time of bidding. Subject to a limited amount of protection afforded to a buyer under consumer protection regulations, you would not be able to rescind or cancel the contact if between the auction day and completion you found further faults with the property, you are buying it “warts and all”.
 
What to take to a property viewing:
• Tape measure (preferably a laser as much quicker especially if viewing is busy)
• Camera
• Notepad
• Torch
• Binoculars (to check roof, gutter and chimney)
• Portable ladder (to access loft space)
• Suitable footwear
• Contact details of the auctioneer and research notes for further investigation in the area e.g. an unidentified building
 
It is advisable to check, either yourself if you are competent to do so, or with an expert for conditions such as damp, rot, subsidence, leaks etc. In addition, if you are planning to alter the layout or extend it, check what would be involved in doing that.
 
As you inspect each room, look out for:
• Damp patches or a musty smell, wallpaper peeling off
• Recently decorated rooms or new woodchip paper that might indicate cracks that have been covered up
• Doors that are crooked or don’t fit in the door frames well, a sign of settlement as is uneven floors, staircases that have dropped on one side and wobbly banisters
• Bad or missing sealing round baths, showers and basins will have led to water running down the back and into the fabric of the building that can cause rot and further damage

Outside
• Use binoculars to check out the roof tiles and ridges, is it sagging in places and have slates been replaced with heavier roof clay tiles that could lead to issues in the future
• Do the gutters and or downpipes etc. look blocked or broken or not running to a ‘fall’. If so they could leak into the walls and cause internal damp. Are the window heads level and not dropping and do the walls run straight in all directions or do they have bows and cracking, this would indicate possible settlement or structural instability. 
• As with recent internal redecoration, if the outside has just been painted it could be hiding a multitude of sins.
 
TIP: Don’t forget to follow up and ask questions that arise from the viewing
 
Points to evaluate:
•  Leasehold or freehold property, any additional ground rent or service charges?
•  Parking, garden, access and property boundaries?
•  Neighbours, traffic and noise?
•  Nearest shops and public transport?
•  Heating, insulation, plumbing, electrics?
•  Council tax band, energy efficiency rating?
•  Any structural issues or recent extensions?
•  Vacant or tenanted and history of the property?
 
Unfamiliar area?
If an area is new to you, it is advisable to look online at crime sites, google the address and street, for example:

 2. Ascertain the likely selling price

Auction properties are usually advertised with a ‘Guide Price’ which are only an indication of a seller’s minimum expectation, remember that they are not necessarily figures for which a property will sell for and may change at any time prior to the auction. It is more important to find out the value of a property going to auction which gives you a better indication of the likely selling price and whether this falls within your budget. Using property auction comparison information can be the quickest and most effective way of finding the latest knowledge.
Finding out the auction history of the street and the surrounding neighbourhood through comparables can give you the knowledge to make an informed calculation of the property’s potential value. This can also help you set your ceiling bid price in preparation for auction day. When considering your bidding limit for a property remember to factor in the appropriate allowance for fees.
Use the EIG Auction Insight service to search for property price comparables
 
Understanding the guide price
It is usual, but not always the case, that a provisional reserve range is agreed between the seller and the auctioneer at the start of marketing. As the reserve is not fixed at this stage and can be adjusted by the seller at any time up to the day of the auction in the light of interest shown during the marketing period, a guide price is issued.
 
The guide price
This guide price can be shown in the form of a minimum and maximum price range within which an acceptable sale price (reserve) would fall, or as a single price figure within 10% of which the minimum acceptable price (reserve) would fall. It is not a valuation and, as such, should not be relied upon by prospective purchasers who should obtain their own professional advice on values.
"The guide price is only an indication as to where the reserve is currently set and not necessarily the auctioneer's expectation as to what it will sell for."
 
The reserve price
A guide price is different to a reserve price - a reserve is a figure below which the auctioneer cannot sell the property during the auction. Each property will be offered subject to a reserve which we expect will be set within the guide range of no more than 10% above a single figure guide. The reserve price is not disclosed and remains confidential between the seller and the auctioneer.
 

3. Read the legal pack

Usually when a property is sold at auction a legal pack containing documents relating to the property being auctioned will be prepared by the seller's solicitors. It will generally consist of the Special Conditions of Sale, the Land Registry Search, Leases (if applicable), Office Copy Entries and other pertinent documents affecting the property.
 
The legal pack is usually available to view online by clicking the tab beside each property in your search results on www.eigpropertyauctions (property auction search) which makes this part of due diligence much easier. However, there is no legal requirement for the vendor to produce or compile a comprehensive legal pack.
 
Reading the legal pack is a two-stage process. First, look through it yourself and then if you are happy with what you’ve seen, that is the time to ask your solicitor to look, or if there were any points you wish to clarify ask your solicitor to look at those first to decide whether you wish to look further.
 
Scrutinise the legal pack
Most auction properties will have a legal pack of documents most of which are important. Probably the most important document in the legal pack is called 'special conditions' in which the vendor states that they do not accept any responsibility for any errors or omissions that you find out about after the auction.
 
Lookout for the 'Special Conditions of Sale'
Anyone can read through the special conditions of sale and covenants.
• The special conditions of sale to look out for are; a shorter completion period, an additional seller’s premium and or overage clauses.
• With covenants, look out for; non development or split, rights of way, retirement flat age restrictions.
• If buying leasehold look for information regarding; the length of lease remaining, service charges and the sinking fund.
If there is nothing obviously untoward then get your solicitor to confirm your views and to look at the rest.
 

4. Instruct a property survey

If you decide that you are still interested in the property after viewing it then now is the time to contact your solicitor and arrange a property survey in advance of the auction. If you have any doubts or worries arising from the viewing then by having a professional survey carried out to inspect the property these points can be addressed. A Surveyor will inspect the property and prepare a report based on the condition of the building.
 
There are 3 types of surveys available for you to choose from depending on the depth of inspection you require. The basic RICS survey uses a traffic light system to rate the condition of the building.
For an impartial assessment of the property search RICS chartered surveyors  
 

5. Ask your solicitor to review the legal pack

By this stage you have personally reviewed the information in the legal pack and if you are still happy to proceed on the basis of what you have seen it is now important to get your solicitor to check the legal pack thoroughly. They can and will look in more detail including looking at access and the local authority planning portal.
Ask your solicitor to look through the special conditions of sale, title deeds, leases, office copy entries etc. Your solicitor will also arrange to do the usual property searches, checking for planning permission for any extensions and for any granted planning permission nearby that may have an effect on the property.
 
If you are not entirely happy with the information in the legal pack or there are still unanswered questions the best advice is 'Do Not Bid' as if you do bid, you will be bound by any matters that come to light later which might adversely affect the property and you’ll be unable to rescind (cancel) the contract. Be aware that the legal pack can be incomplete, information may come in stages and very close to the auction day. Where a legal pack is incomplete contact the vendor’s solicitor. You may have to take a view, for example, if leasehold it might be appropriate to knock on the neighbour’s door to ask questions about the managing agent.
 
If you are happy with your solicitors findings or made necessary adjustments in your costings for any issues that have been raised that affect your bidding limit then you have completed your due diligence and together with your bidding plan you are ready to go to auction.
 
Legal paperwork can always be viewed in the auction room on the day of the sale, but by this time it may be too late for the inexperienced purchaser.
 

Final steps

On auction day, remember to check for any last-minute changes or addendums to the legal pack that there may be prior to the start of bidding so you don’t get caught out.
It is worth keeping a note of your bidding strategy and upper limit to hand for quick reference during the bidding process so you don’t get carried away on the day.