Property Auction Fee's and Calculations

Madmax1983

There is a property I'm interested in, I'm a first time buyer on a 18k income, there is not much in my price range, Its selling through auction.

To secure the purchase it states I must pay a deposit of 5% which contributes towards the overall purchase price of the property. The deposit is non-refundable. On top of this there is a non-refundable reservation fee of £6,000 inc VAT and this does not form part of the purchase price. So altogether £11k in fee's.

The guide price is £55,000, I know the guide price is often low to entice buyers. 1 bedroom flats are quite rare in this area and desirable, they generally range from £65-95k, you can get a 2 bedroom back to back house for about £100,000 in a slightly rougher side of the area nearby. I have looked at the price history and it has fluctuated, it was listed for £75,000 a year ago (no idea if it sold for that), flats of the same size in same building have been listed for as much as £89,000 in 2012. But when you use valuation tools such as themovemarket, it values it at £55,000 on the dot. I personally think it is worth about £70-75k , maybe less because I think it is in need of modernising (needs insulation, re-plastering in one room, new boiler, kitchen etc).

I am trying to calculate a highest bid I am willing to go to, accounting for the fee's and risk involved . If its worth £55,000 and there is a non refundable fee of £6,000 that doesn't count toward price of the house (is just going to auctioners), that is a sizable 11% of the house price for nothing. If that were the case I wouldn't pay anything more than £44k for the property. But if its worth upto £75,000 it would make sense to bid up to £69,000. The rental income on the property (not that I am planning to rent it, its just maybe an indicator of the value in terms of investment) is consistently around £550 pcm over the last few years, which is quite good actually, if it was modernised I think it could easily get £600-650 pcm.

I have heard of some developers just refusing to pay the fee's prescribed by the auction until contracts are signed, I am tempted to do that, because it does feel risky to part with £11k before I even have a contract.

What do you guys think, do you have any tips for how I might calculate my highest bid and the value of the property.

ps it is a leasehold, it has 1000 years on it, and

there is no service charges or ground rent to pay. No tenants currently as vendor is occupying. Its spacious and has communal gardens.

davidmcn

It's called the "modern method of auction", not an "auction" in any traditional sense, and you should stay well clear rather than encourage such a rip-off.

Madmax1983

I understand your point of view and I am hesitant, but also I really want an affordable place to live and I am not a cash buyer, I need mortgage and if I can compensate for the fee in my bidding, I won't lose out will I? ( I mean if I get it for that discounted price), I know the seller will lose out, but unfortunately they chose to sell it in this way. There is pretty much nothing else in my price range in the area I need to be in for work. So I am kind of willing to compromise on ethics to get a secure home.

ALSO, I could try just refusing to pay the fee's until contracts are signed, some developers on this site say thats what they do (I suppose they don't mind if they lose, have more bargaining power), the agent may rather see it through than put it up for auction again, depending obviously on if there are many other bidders.

Slithery

Is the property even mortgageable? A lot of properties in auctions are there because they aren't.

davidmcn

Ok, let's say you pay the £6k (which is an absurd 11% commission for the agents, or possibly multiples of that if there are abortive transactions). In what circumstances can you pull out without losing that money? As above, there is probably a reason (or several) why it's not being sold in the traditional way. Even if you're prepared to take a view on something, your lender might not be (or they might just be too slow in issuing a mortgage offer) - and then you're stuffed.

Madmax1983

@slithery, I don't see why it would be unmortgagable, I had a good look with my brother who is a builder, and there doesn't seem to be any structural issues with the building, no rot, no evidence of termites/wood worm, other fats within the building have been sold the normal way for up to £89k, the lease is as long as it can get, it has working electrics, plumbing and kitchen/bathroom, there are no sitting tenants. You might be right though, but I don't see how.

Madmax1983

Thanks Davidmcn, yeah I can see the draw backs , but with normal auctions you need cash don't you? like you have to make a transaction on the exact time of winning. So I suppose thats also pretty risky if you haven't done your homework too.

davidmcn

Madmax1983 wrote: »

Thanks Davidmcn, yeah I can see the draw backs , but with normal auctions you need cash don't you? like you have to make a transaction on the exact time of winning. So I suppose thats also pretty risky if you haven't done your homework too.

Yes, neither are sensible options for first time buyers really. A "normal" auction is somewhat fairer in that both parties are in a contract when the hammer falls, rather than the wriggle room which the "modern method" allows to the vendor.

Slithery

Madmax1983 wrote: »

but with normal auctions you need cash don't you? like you have to make a transaction on the exact time of winning.

No. Usually a 10% deposit is required at exchange, the rest is due on completion 28 days later.

eddddy

Madmax1983 wrote: »

ALSO, I could try just refusing to pay the fee's until contracts are signed,

You can't do that if you win the property in the auction - you will have agreed to pay the fee as part of the terms of bidding at the auction. (The auctioneer is likely to sue you for breach of contract.)

But you can make an offer before the auction or after the auction on the basis that you won't pay any fees.

It's then up to the seller whether they will accept it. (The seller's contract will say that in those circumstances, the seller has to pay the £6k fee.)

Madmax1983 wrote: »

The guide price is £55,000...

Guide prices are almost always about 10% below the reserve price (because of an ASA ruling) - so the reserve price is probably £60k.

But if the property doesn't sell at auction, I guess the seller might consider lower offers (not forgetting the £6k that somebody will have to pay).

D_M_E

It's not an auction, it's a scammer's charter.

You will be paying a fee of £6000 for nothing with no guarrantee of buying the property - this is a lot of money, especially as the property is not that expensive.