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Can I Buy A House At Auction With A Mortgage In Principle?

Nearly 700,000 to 800,000 houses are sold each year, but 18,000 to 20,000 houses are sold at auction which accounts for just over 2% of home sales (according to Home Selling Expert).

Even though there are many ways to buy an auction property, can you buy a house at auction with a mortgage in principle?

In short, yes, but auction properties have a set period where you need to pay the full balance due and having an “agreement in principle” (AiP) would ensure the amount you could be offered but not necessarily the timescale when you will receive it, but you need to ensure you have enough to cover the deposit at auction which is roughly 10%.

That’s not all…

If you are someone who isn’t paying in cash at the property auction then you must receive a mortgage in principle first and the way to get this from the lender is to provide your bank or lender with proof of income.

This is generally done with recent payslips you have, or even bank statements showing your weekly or monthly income.

From this, you will then be able to secure a “mortgage in principle” which will act as proof of funds available at a property auction.

TOP TIP:
If this is the route you want to take, make sure you survey the property before going to auction, this way you have an idea of the extra costs involved as well as your mortgage.

Why Are So Many Houses Going To Auction?

There are many reasons why auctions are used by sellers and property investors for a quick sale and a bargain.

In general, so many houses go to auction because some properties will not be up to standard for some estate agents and in most cases, these could be bank foreclosures looking for a quick sale to offset the unpaid loan on the house or for homeowners to sell their houses in a fiercely competitive market.

 But there’s more…

According to the New York Times, property auctions are more common and popular today across many countries because of the bargains people have on potential properties making property investors the most money.

The table below shows the number of houses sold at auction along with the total value raised (to the nearest £100,000) from 2009 to 2021.

Total Number Of Auction Properties (2009-2021)

YearAuction Lots OfferedAuction Lots Sold(%) Auction Lots SoldTotal Value Raised (£)
200929,72022,37375.3%£3,471,600,000
201031,45722,01570%£3,350,600,000
201132,61224,12574%£3,332,700,000
201234,06525,53975%£3,498,200,000
201334,03026,45877.7%£3,829,000,000
201435,00326,86776.8%£4,378,400,000
201533,24125,92178%£4,491,000,000
201633,85525,79976.2%£4,685,000,000
201732,98725,37676.9%£4,632,800,000
201831,49023,57774.9%£4,157,500,000
201928,93821,89975.7%£3,643,800,000
202022,69917,65877.8%£3,282,900,000
202124,46919,74880.7%£4,260,800,000
The number of houses sold at auction between 2009-and 2021.

The data above was gathered from the EIG property auctions newsletter and shows that not all auction properties are always sold along with a steady decline in the number of properties sold at auction since 2014.

However, a spike in the number of properties sold was shown in 2021, since the economy is still recovering from the COVID-19 pandemic and has caused so many more people to buy property since interest rates were much lower during this period.

That’s not all…

Since the market crash in 2008 which cause so many default mortgage payments and home foreclosures this crisis spiked over 25% more buyers from 2010-to 2013 and this was due to how cheap it was to buy houses at this time.

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TOP TIP:
After a market crash that has caused real estate and stocks to plummet, this can be a good time to buy property at a bargain while the economy is recovering and interest rates are low, especially at auction due to a higher increase in sellers needing quick cash during hard times. 

Is It Safe To Buy Auction Property?

Although buying properties can be a cheap way to buy a house under market value, how safe is it to buy an auction property?

Buying a property at auction is not as safe as going to a real estate agent, this is because in most cases you are not allowed a property inspection or any viewing inside the interior, this would mean you buy the property at face value not knowing the overall condition or work needed to be done.

That’s not all…

Most houses that go to auction are down to bank foreclosures on the property to help offset the rest of the loan.

This doesn’t necessarily mean that the interior of the property is in bad condition but can mean there are hidden costs associated with the reason behind the property being foreclosed on in the first place.

Not to mention, you should be prepared for anything hidden in the legal pack you get which can make your purchase more costly and complex due to the number of loopholes added there.

Either way, it pays to do as much due diligence as you possibly can in the auction property you bid on.

There are other safer ways to invest in real estate, especially if you have no money and bad credit. You can find out more about real estate investing in this post here.

How Does Buying A House At Auction Work?

How Does Buying A House At Auction Work?

There are usually two methods you go through when purchasing a house at the auction but both include the final bid being a binding contract that you are agreeing to put down an initial deposit on the day of the auction which can range from 5 to 10%.

But there’s more to this…

As if you suddenly change your mind about the auction property you are not likely to get your deposit back and possibly incur extra costs such as administration fees.

So be sure that you want the property you bidding on in the first place.

  • Traditional auction method: The buyer would place their bid, if they win they would put down 10%, along with exchanging contracts on the day of the auction.
  • Modern auction method: You can bid for auctioned properties online now and only have to secure 5% on the day the auction is over (if you win) followed by up to 28 days to exchange contracts and a further 28 days to ensure you complete the rest of the payment.

Although the modern approach to auctioning property can be less costly and give you more time, you should still be certain about the property you bid on.

How Much Less Do Houses Sell For At Auction?

On average you can expect to buy a house at auction for about 85%-90% of the total property value, however, some auction properties can sell for as little as 70% under market value or even 10% more, which is why you should pay attention to the guide price.

That’s not all…

As this is the overall average, not necessarily what you will get and this is why there is a guide price for you to determine if the property you buy is a good fit for you.

Typically properties can sell for 15% to 25% higher than the guide price, but this can vary from a variety of factors.

This is because auction properties can be sold up to double and in some cases triple the guide price, which is dependent on:

  1. the location of the property.
  2. the overall condition of the property.
  3. the demand for the property.

Although these are just a few things to consider, these can play a major role in the overall selling price of the property you bid on.

How Accurate Are Guide Prices At Property Auctions?

The guide price is there as an indication for bidders to see if this is a property they want to pursue, and this is an estimate due to the reserve price not being fixed because this can change buy the seller at any time, but on average the reserve price is + or – 10% of the guide price.

As a result, both the guide price and reserve price can change at any time leading up to and on the day of the auction taking place.

TOP TIP:
Consider the guide price as the lowest you would pay for the property and add 10% onto it to estimate the reserve price and up to 25% on the guide price to give a rough estimation of what the lowest cost could be on that property.

Just Before You Go…

You need to consider the hidden costs associated with buying a house at the auction whether you have a mortgage in principle or not.

This is because you could spend up to double and maybe triple the guide price which may not leave you enough room for profit on top of your purchase, especially with the added risk of buying a property at auction.

That’s not all…

As you need to take into account the fees you need to cover in such a short space of time. which can leave you in a more complex situation both legally and financially.

So be sure to do your due diligence before buying a house at auction.

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