Auction sales are becoming increasingly popular, especially in respect of properties that are difficult to value, require significant renovation works, are of low or mixed quality, require planning consent for their use and those that are being sold following repossession.

The idea of landing yourself a bargain whilst also avoiding the drawn out and potentially lengthy process that is followed in a more traditional property purchase seems very attractive. However the process has a number of disadvantages from the potential buyer's perspective.

Contract

Before the auction it is the seller who prepares the first draft of the sale documents. As the seller has the advantage of being able to continue negotiations with more than one bidder, bidders are encouraged only to make changes to the documents which they consider are absolutely necessary.

As the contract becomes binding at the auction and there is no opportunity for the buyer to negotiate its terms on the day, the buyer needs to be comfortable with the contract beforehand.

It is essential to check carefully whether any special conditions of sale have been imposed by the seller and consider what implications they could have for the buyer. Such special conditions of sale could, for example, impose new restrictive covenants on the property, require the buyer to reimburse the seller for the cost of searches and remove the buyer's right to raise any requisitions on title after the auction.

For instance, under the standard conditions of sale at auction, the sale will usually be with vacant possession unless there are any special conditions to the contrary. Giving vacant possession means that on completion the seller must make the property available in a state in which the buyer can both physically and legally occupy it and give the buyer undisturbed enjoyment of the property. The seller will be in breach of this obligation if something is left in the property that substantially interferes with the physical enjoyment of the property but which is removable, such as large quantities of rubbish or chattels. If in the contract the seller adds a special condition removing the requirement for him to give vacant possession, the buyer would have to dispose of the rubbish or chattels at his own expense which could prove to be very costly. Therefore it is essential for the buyer to check whether any special conditions have been imposed by the seller and consider the implications of these.

Title / Survey

Receivers selling a property following repossession usually have little or no knowledge of the property being sold and it is normal for them to give no title guarantee. The danger is that there may be something that the buyer cannot discover on an investigation of title that the seller has not told him about (for example, an overriding interest). If this happens, the buyer has no recourse against the seller. Therefore a thorough investigation of title is essential before the auction to decide whether the buyer should take out defective title insurance.

Although a prospective seller should disclose any irremediable defect in title which the buyer could not have discovered by any reasonable inspection of the property (for example, a right of way which would not be apparent from an inspection of the property, a right for underground pipes to cross land, a restrictive covenant, a tenancy etc), there is no obligation on the seller to disclose a defect which the buyer might have been able to discover from a reasonable inspection of the property. In this instance the normal caveat emptor ('buyer beware') rules apply. Therefore, for the purposes of the implied term that the seller has good title, the seller would not have to disclose a latent defect in the construction or design of a property.

For the above reason it is advisable for the prospective buyer to be accompanied by a builder or an architect on inspection of the property to obtain advice on any structural issues that may cause future problems or that could affect the buyer's renovation plans.

In addition, it is also important to consider whether all of the relevant searches have been provided by the seller. For example, a failed environmental search could cause a lot of issues for the buyer and because land contamination is not a defect of title but a physical defect, the principle of caveat emptor applies. Therefore if insufficient searches are provided by the seller, the buyer should question the reasoning behind this and request additional searches before buying the property.

Mortgage/ Insurance

If the buyer requires a mortgage to complete the purchase it is essential that mortgage arrangements are put in hand as if the buyer cannot obtain a mortgage after the auction and - as such - is unable to complete, there is a risk that the buyer will lose any deposit paid.

It is also likely that the auction contract may require the buyer to insure the property from the date of the auction (i.e. the buyer becomes liable for any damage to the building as soon as the hammer falls).

Conclusion

Although buying a property at an auction can be attractive, it can also be very risky. It definitely pays off for any prospective buyer to do proper and detailed research to ensure that the apparent 'bargain' does not turn out to be an investment costing more than they bargained for.